China Roundup: Beijing is tearing down the digital ‘walled gardens’

Hello and welcome back to TechCrunch’s China roundup, a digest of recent events shaping the Chinese tech landscape and what they mean to people in the rest of the world.

This week, China gets serious about breaking down the walled gardens that its internet giants have formed for decades. Two major funding rounds were announced, from the newly established autonomous driving unicorn Deeproute.ai and fast-growing, cross-border financial service provider XTransfer.

Tear down the walls

The Chinese internet is infamously siloed, with a handful of “super apps” each occupying a cushy, protective territory that tries to lock users in and keep rivals out. On Tencent’s WeChat messenger, for instance, links to Alibaba’s Taobao marketplace and ByteDance’s Douyin short video service can’t be viewed or even redirected. That’s unlike WhatsApp, Telegram or Signal that offer friendly URL previews within chats.

E-commerce platforms fend off competition in different ways. Taobao uses Alibaba’s affiliate Alipay as a default payments option, omitting its arch rival WeChat Pay. Tencent-backed JD.com, a rival to Alibaba, encourages its users to pay through its own payments system or WeChat Pay.

But changes are underway. “Ensuring normal access to legal URLs is the basic requirement for developing the internet,” a senior official from China’s Ministry of Industry and Information Technology said at a press conference this week. He added that unjustified blockages of web links “affect users’ experience, undermine users’ rights, and disrupt market orders.”

There is some merit in filtering third-party links when it comes to keeping out the likes of pornography, misinformation and violent content. Content distributors in China also strictly abide by censorship rules, silencing politically sensitive discussions. These principles will stay in place, and MIIT’s new order is really to crack anticompetitive practices and wane the power of the bloated internet giants.

The call to end digital walled gardens is part of MIIT’s campaign, started in July, to restore “orders” to the Chinese internet. While crackdowns on internet firms are routine, the spate of new policies announced in recent months — from new data security rules to heightened gaming restrictions — signify Beijing’s resolution to curb the influence of Chinese internet firms of all kinds.

The deadline for online platforms to unblock URLs is September 17, the MIIT said earlier. Virtually all the major internet companies have swiftly issued statements saying they will firmly carry out MIIT’s requirements and help promote the healthy development of the Chinese internet.

Internet users are bound to benefit from the dismantling of the walled gardens. They will be able to browse third-party content smoothly on WeChat without having to switch between apps. They can share product links from Taobao right within the messenger instead of having their friends copy-paste a string of cryptic codes that Taobao automatically generates for WeChat sharing.

Robotaxi dream

Autonomous driving startup Deeproute.ai said this week it has closed a $300 million Series B round from investors including Alibaba, Jeneration Capital, and Chinese automaker Geely. The valuation of this round was undisclosed.

We’ve seen a lot of publicity from Pony.ai, WeRide, Momenta and AutoX but not so much Deeproute.ai. That in part is because the company is relatively young, founded only in 2019 by Zhou Guang after he was “fired” by his co-founders at the once-promising Roadstar.ai amid company infighting.

Investors in Roadstar.ai reportedly saw the dismissal of Zhou as detrimental to the startup, which had raised at least $140 million up to that point, and subsequently sought to dissolve the business. It appears that Zhou, formerly the chief scientist at Roadstar, still commands the trust of some investors to support his reborn autonomous driving venture.

Like Pony.ai and WeRide, Deeproute is trying to operate its own robotaxi fleets. While the business model gives it control over reams of driving data, it’s research- and cash-intensive. As such, major Chinese robotaxi startups are all looking at faster commercial deployments, like self-driving buses and trucks, to ease their financial stress.

Cross-border trade boom

The other major funding news this week comes from Shanghai-based XTransfer, which helps small-and-medium Chinese exporters collect payments from overseas. The Series C round, led by D1 Partners, pulled in $138 million and catapulted Xtransfer’s valuation to over $1 billion. The proceeds will go towards product development, hiring and global expansion.

Founded by former executives from Ant Group, XTransfer tries to solve a pain point faced by small and medium exporters: opening and maintaining bank accounts in different countries can be difficult and costly. As such, XTransfer works as a payments gateway between its SME customer, the party that pays it, and their respective banks.

As of July, XTransfer’s customers had surpassed 150,000, most of which are in mainland China. The company of over 1,000 employees is also expanding into Southeast Asia.

While business-to-business export is booming in China, more and more products are also being directly sold from Chinese brands to consumers around the world. Some of the most successful examples, like Shein and Anker, use a different set of payments processors for their direct-to-consumer sales, which tend to be in bigger volume but smaller in average ticket value.

China roundup: Tencent takes on sites trying to circumvent its age limits

Hello and welcome back to TechCrunch’s China roundup, a digest of recent events shaping the Chinese tech landscape and what they mean to people in the rest of the world.

The enforcement of China’s new gaming regulations is unfolding like a cat-and-mouse game, with the country’s internet giants and young players constantly trying to outsmart each other. Following Didi’s app ban, smaller ride-hailing apps are availing themselves of the potential market vacuum.

Tencent and young gamers

The Chinese saying “Where there is a policy, there is a countermeasure” nicely encapsulates what is happening in the country’s tightening regulatory environment for video games. This month, China enacted the strictest rules to date on playtime among underage users. Players under the age of 18 were startled, scrambling to find methods to overcome the three-hour-per-week quota.

Within days, gaming behemoth Tencent has acted to root out these workarounds. It sued or issued statements to over 20 online services selling or trading adult accounts to underage players, the company’s gaming department said in a notice on Weibo this week.

Children were renting these accounts to play games for two hours at a few dollars without having to go through the usual age verification checks. Such services “are a serious threat to the real-name gaming system and underage protection mechanism,” Tencent said, calling for an end to these practices.

Educational games

China has mainly been targeting games that are addiction-inducing or deemed “physically and mentally harmful” to minors. But what about games that are “good” for kids?

When Tencent and Roblox set up a joint venture in China in 2019, the speculation was that the creator-focused gaming platform would give Tencent a leg up in making educational games to inspire creativity or something that would help it align better with Beijing’s call for using tech to do more social good. As we wrote earlier:

Roblox’s marketing focus on encouraging “creativity” could sit well with Beijing’s call for tech companies to “do good,” an order Tencent has answered. Roblox’s Chinese website suggests it’s touting part of its business as a learning and STEM tool and shows it’s seeking collaborations with local schools and educators.

If Roblox can inspire young Chinese to design globally popular games, the Chinese authorities may start regarding it as a conduit for exporting Chinese culture and soft power. The gaming industry is well aware that aligning with Beijing’s interests is necessary for gaining support from the top. Indeed, a member of the Chinese People’s Political Consultative Conference, an organ for non-political spheres like the business community to “put forward proposals on major political and social issues,” said in June that video games are “an effective channel for China’s cultural exports.”

The case of Roblox will be interesting to watch for reading Beijing’s evolving attitude toward games for educational and export purposes.

Didi challengers

Didi has had many rivals over the years, but none has managed to threaten its dominance in China’s ride-hailing industry. But recently, some of its rivals are seeing a new opportunity after regulators banned new downloads of Didi’s app, citing cybersecurity concerns. Cao Cao Mobility appears to be one.

Cao Cao, a premium ride-hailing service under Chinese automaker Geely, announced this week a $589 million Series B raise. The round should give Cao Cao ammunition for subsidizing drivers and passengers. But amid the government’s spade of anti-competition crackdowns, internet platforms these days are probably less aggressive than Didi in its capital-infused growth phase around 2015.

The app ban seems to have had a limited effect on Didi so far. The app even saw a 13% increase in orders in July, according to the Ministry of Transport. While people who get new phones will not be able to download Didi, they still are able to access its mini app run on WeChat, which is ubiquitous in China and has a sprawling ecosystem of third-party apps. It’s unclear how many active users Didi has lost, but its rivals will no doubt have to shell out great incentives to lure the giant’s drivers and customers away.

DTC fast fashion

Venture capitalists are pouring money into China’s direct-to-consumer brands in the hope that the country’s supply chain advantage coupled with its pool of savvy marketers will win over Western consumers. July saw PatPat, a baby clothing brand, raise a sizable $510 million raise. This month, news came that up-and-coming DTC brand Cider, which makes Gen Z fast fashion in China and sells them in the U.S., has secured a $130 million Series B round at a valuation of over $1 billion. The news was first reported by Chinese tech news site 36Kr and we’ve independently confirmed it. 

DST Global led Cider’s new round, with participation also from the startup’s existing A16Z, an existing investor and Greenoaks Capital. Investors are clearly encouraged by Shein’s momentum around the world — its new download volume has surpassed that of Amazon in dozens of countries and is often compared side by side with industry behemoth Zara. Unlike a pure internet firm, export-oriented e-commerce has a notoriously long and complex value chain, from design, production, marketing and shipment to after-sales service. Shein’s story might have inspired many followers, but it won’t be easily replicated.

China roundup: Beijing wants tech giants to shoulder more social responsibilities

Hello and welcome back to TechCrunch’s China roundup, a digest of recent events shaping the Chinese tech landscape and what they mean to people in the rest of the world.

This week, the gaming industry again became a target of Beijing, which imposed arguably the world’s strictest limits on underage players. On the other hand, China’s tech titans are hastily answering Beijing’s call for them to take on more social responsibilities and take a break from unfettered expansion.

Gaming curfew

China dropped a bombshell on the country’s young gamers. As of September 1, users under the age of 18 are limited to only one hour of online gaming time: on Fridays, Saturdays and Sundays between 8-9 p.m.

The stringent rule adds to already tightening gaming policies for minors, as the government blames video games for causing myopia, as well as deteriorating mental and physical health. Remember China recently announced a suite of restrictions on after-school tutoring? The joke going around is that working parents will have an even harder time keeping their kids occupied.

A few aspects of the new regulation are worth unpacking. For one, the new rule was instituted by the National Press and Publication Administration (NPPA), the regulatory body that approves gaming titles in China and that in 2019 froze the approval process for nine months, which led to plunges in gaming stocks like Tencent.

It’s curious that the directive on playtime came from the NPPA, which reviews gaming content and issues publishing licenses. Like other industries in China, video games are subject to regulations by multiple authorities: NPPA; the Cyberspace Administration of China (CAC), the country’s top internet watchdog; and the Ministry of Industry and Information Technology, which oversees the country’s industrial standards and telecommunications infrastructure.

As analysts long observe, the mighty CAC, which sits under the Central Cyberspace Affairs Commission chaired by President Xi Jinping, has run into “bureaucratic struggles” with other ministries unwilling to relinquish power. This may well be the case for regulating the lucrative gaming industry.

For Tencent and other major gaming companies, the impact of the new rule on their balance sheet may be trifling. Following the news, several listed Chinese gaming firms, including NetEase and 37 Games, hurried to announce that underage players made up less than 1% of their gaming revenues.

Tencent saw the change coming and disclosed in its Q2 earnings that “under-16-year-olds accounted for only 2.6% of its China-based grossing receipts for games and under-12-year-olds accounted for just 0.3%.”

These numbers may not reflect the reality, as minors have long found ways around gaming restrictions, such as using an adult’s ID for user registration (just as the previous generation borrowed IDs from adult friends to sneak into internet cafes). Tencent and other gaming firms have vowed to clamp down on these workarounds, forcing kids to seek even more sophisticated tricks, including using VPNs to access foreign versions of gaming titles. The cat and mouse game continues. 

Prosper together

While China curtails the power of its tech behemoths, it has also pressured them to take on more social responsibilities, which include respecting the worker’s rights in the gig economy.

Last week, the Supreme People’s Court of China declared the “996” schedule, working 9 a.m. to 9 p.m. six days a week, illegal. The declaration followed years of worker resistance against the tech industry’s burnout culture, which has manifested in actions like a GitHub project listing companies practicing “996.”

Meanwhile, hardworking and compliant employees have often been cited as a competitive advantage of China’s tech industry. It’s in part why some Silicon Valley companies, especially those run by people familiar with China, often set up branches in the country to tap its pool of tech talent.

The days when overworking is glorified and tolerated seem to be drawing to an end. Both ByteDance and its short video rival Kuaishou recently scrapped their weekend overtime policies.

Similarly, Meituan announced that it will introduce compulsory break time for its food delivery riders. The on-demand services giant has been slammed for “inhumane” algorithms that force riders into brutal hours or dangerous driving.

In groundbreaking moves, ride-hailing giant Didi and Alibaba’s e-commerce rival JD.com have set up unions for their staff, though it’s still unclear what tangible impact the organizations will have on safeguarding employee rights.

Tencent and Alibaba have also acted. On August 17, President Xi Jinping delivered a speech calling for “common prosperity,” which caught widespread attention from the country’s ultra-rich.

“As China marches towards its second centenary goal, the focus of promoting people’s well-being should be put on boosting common prosperity to strengthen the foundation for the Party’s long-term governance.”

This week, both Tencent and Alibaba pledged to invest 100 billion yuan ($15.5 billion) in support of “common prosperity.” The purposes of their funds are similar and align neatly with Beijing’s national development goals, from growing the rural economy to improving the healthcare system.

China Roundup: Beijing takes aim at algorithm, Xiaomi automates electric cars

Hello and welcome back to TechCrunch’s China roundup, a digest of recent events shaping the Chinese tech landscape and what they mean to people in the rest of the world.

The biggest news of the week again comes from Beijing’s ongoing effort to dampen the influence of the country’s tech giants. Regulators are now going after the exploitative use of algorithm-powered user recommendations. We also saw a few major acquisitions this week. Xiaomi is acquiring an autonomous vehicle startup called Deepmotion, and ByteDance is said to be buying virtual reality hardware startup Pico.

Algorithmic regulation

Beijing has unveiled the draft of a sweeping regulation to rein in how tech companies operating in China utilize algorithms, the engine of virtually all lucrative tech businesses today from short videos and news aggregation to ride-hailing, food delivery and e-commerce. My colleague Manish Singh wrote an overview of the policy, and here’s a closer look at the 30-point document proposed by China’s top cyberspace watchdog.

Beijing is clearly wary of how purely machine-recommended content can stray away from values propagated by the Communist Party and even lead to the detriment of national interests. In its mind, algorithms should strictly align with the interest of the nation:

Algorithmic recommendations should uphold mainstream values… and should not be used for endangering national security (Point 6).

Regulators want more transparency on companies’ algorithmic black boxes and are making them accountable for the consequences of their programming codes. For example:

Service providers should be responsible for the security of algorithms, create a system for… the review of published information, algorithmic mechanisms, security oversight… enact and publish relevant rules for algorithmic recommendations (Point 7). 

Service providers… should not create algorithmic models that entice users into addiction, high-value consumption, or other behavior that disrupts public orders (Point 8).

The government is also clamping down on discriminative algorithms and putting some autonomy back in the hands of consumers:

Service providers… should not use illegal or harmful information as user interests to recommend content or create sexist or biased user tags (Point 10).

Service providers should inform users of the logic, purpose, and mechanisms of the algorithms in use (Point 14).

Service providers… should allow users to turn off algorithmic features (Point 15).

The regulators don’t want internet giants to influence public thinking or opinions. Though not laid out in the document, censorship control will no doubt remain in the hands of the authorities.

Service providers should not… use algorithms to censor information, make excessive recommendations, manipulate rankings or search results that lead to preferential treatment and unfair competition, influence online opinions, or shun regulatory oversight (Point 13).

Like many other aspects of the tech business, certain algorithms are to obtain approval from the government. Tech firms must also hand over their algorithms to the police in case of investigations.

Service providers should file with the government if their recommendation algorithms can affect public opinions or mobilize civilians (Point 20).  

Service providers… should keep a record of their recommendation algorithms for at least six months and provide them to law enforcement departments for investigation purposes (Point 23). 

If passed, the law will shake up the fundamental business logic of Chinese tech companies that rely on algorithms to make money. Programmers need to pore over these rules and be able to parse their codes for regulators. The proposed law seems to have even gone beyond the scope of the European Union’s data rules, but how the Chinese one will be enforced remains to be seen.

Lei Jun bets on autonomous cars

In Xiaomi’s latest earnings call, the smartphone maker said it will acquire DeepMotion, a Beijing-based autonomous driving startup, to aid its autonomous driving endeavor. The deal will cost Xiaomi about $77.3 million, and “a lot of that will be in terms of stock” and “a lot of these payments will be deferred until certain milestones are hit,” said Wang Xiang, Xiaomi president on the call.

Xiaomi’s founder Lei Jun earlier hinted at the firm’s plan to enter the crowded space. On July 28, Lei announced on Weibo, China’s Twitter equivalent, that the company is recruiting 500 autonomous driving experts across China.

Automation has become a selling point for China’s new generation of electric vehicle makers, often with companies conflating advanced driver-assistance systems (ADAS) with Level 4 autonomous driving. Such overstatements in marketing material mislead consumers and make one question the real technical capability of these nascent EV players.

Xiaomi has similarly unveiled plans to manufacture electric cars through a separate car-making subsidiary. The ADAS capabilities brought by DeepMotion are naturally a nice complement to Xiaomi’s future cars. As Wang explained:

We believe that there’s a lot of synergies with [DeepMotion’s ADAS] technology with our EV initiatives. So I think it tells you a couple of points. Number one is, we will roll out EV business. And I said in our prepared remarks, we’ve been very focused on hiring the right team for the EV business at this point in time, formulating our strategy, formulating our product strategy, et cetera, et cetera. But at the same time, we are not afraid to apply it and integrate other teams if we find that those will help us accelerate our plan right.

It’s noteworthy that DeepMotion, founded by Microsoft veterans, specializes in perception technologies and high-precision mapping, which puts it in the vision-driven autonomous driving camp. A number of major Chinese EV makers rely on consumer-grade lidar to automate their cars.

ByteDance goes virtual

ByteDance is said to be buying Beijing-based VR hardware maker Pico for 5 billion yuan ($770 million), according to Chinese VR news site Vrtuoluo. ByteDance could not be immediately reached for comment.

Advanced VR headsets are often expensive due to the cost of high-end processors. Experts observe that most VR hardware makers are yet to enter the mass consumer market. They are hemorrhaging cash and living off generous venture money and corporate deals.

ByteDance might be buying a money-losing business, but Pico, one of the major VR makers in China, provides a fast track for the TikTok parent to enter VR manufacturing. As the world’s largest short video distributor and an aggressive newcomer to video games, ByteDance has no shortage of creative talent. We will see how it works on producing virtual content if the Pico deal goes through.

China roundup: Beijing takes stake in ByteDance, Amazon continues China crackdown

Hello and welcome back to TechCrunch’s China roundup, a digest of recent events shaping the Chinese tech landscape and what they mean to people in the rest of the world.

This week, investors’ concerns mount as news came that the Chinese government has taken a stake ByteDance, TikTok’s parent and one of the world’s largest private internet firms. Meanwhile, Amazon’s crackdown on Chinese sellers continues and is forcing many traders in southern China out of business, and the government passed a sweeping data protection law that will take effect in November.

A state stake

The Chinese government’s grand plan to assert more control over the country’s internet behemoths continues. This week, The Information reported that a domestic entity of ByteDance sold a 1% stake to a government affiliate in April. The deal was also recorded on Tianyancha, a database of publicly available corporate information, as well as the official enterprise registration index.

The move didn’t come abruptly. Beijing was mulling over small shares in private tech firms as early as 2017. The Wall Street Journal reported at the time that internet regulators discussed taking 1% stakes in companies including WeChat operator Tencent, Twitter-like Weibo and YouTube-like Youku.

In April 2020, WangTouTongDa, a subsidiary of China Internet Investment Fund, which is in turn controlled by China’s top internet watchdog, acquired a 1% stake in Weibo for 10 million yuan, according to Weibo’s filing to the U.S. securities regulator. Weibo did not mention WangTouTongDa’s relationship with the state in its filing.

Similarly, ByteDance sold a 1% stake to three entities set up by top regulatory bodies: China Internet Investment Fund; China Media Group, controlled by the Communist Party’s propaganda department; and the Beijing municipal government’s investment arm.

In response to Beijing’s move on ByteDance, Republican senator Marco Rubio urged President Joe Biden this week to block TikTok in the U.S.

Exactly how much power Beijing gains over ByteDance from taking the small stake remains fuzzy, but Weibo’s disclosure to investors offers some clues.

It’s critical to note that the government holds stakes in the domestic operating entity of both Weibo and ByteDance. Internet companies in China often set up offshore entities that are entitled to the financial benefits of their mainland Chinese operations through contractual agreements. The framework is called a variable interest entity or VIE. While the structure allows Chinese firms to seek overseas funding due to China’s restrictions on foreign investments, it has come under increasing scrutiny by Beijing.

Weibo said in the filing that WangTouTongda, its state-owned investor, will be able to appoint a director to the three-member board of its Chinese entity and veto certain matters related to content and future financings.

ByteDance likely has a similar arrangement with its state investor. The government did not obtain a stake in TikTok, which is a subsidiary of a separate offshore entity incorporated in the Cayman Islands, The Information pointed out. This should provide some reassurance to U.S. regulators, though concerns about Beijing’s sway in Chinese companies abroad probably won’t go away.

Indeed, the Biden administration in June replaced the Trump-era orders to ban ByteDance and WeChat with a more measured policy requiring the Commerce Department to review apps with ties to “jurisdiction of foreign adversaries” that may pose national security risks.

TikTok has been fighting accusations that it hands over user data to Beijing. ByteDance is the fourth-largest lobbying spender in the U.S. so far this year, just after Amazon, Facebook and Alphabet. Beijing’s investment is going to cost it more campaign efforts.

Beleaguered Amazon sellers

In May, I reported that Amazon shuttered some of its largest sellers from China over violations of platform rules, including using fake reviews and incentives to solicit positive reviews from customers. The crackdown drove China’s online exporters into a panic, and as it turned out, it wasn’t a one-off ambush from Amazon but a prolonged war. While the exact number of Chinese stores affected is not disclosed, industry observers such as Marketplace Pulse said “hundreds of” top Chinese sellers had been suspended as of early July.

Punished accounts are suspended, with their goods withheld and deposits frozen by Amazon. Companies in Shenzhen, home to the majority of the world’s Amazon sellers, laid off thousands of staff in recent months. The owner of a sizable seller in Shenzhen recently died by suicide due to the debacle, according to an acquaintance of the owner.

To sellers that have survived the crackdown, the attack by Amazon “would have happened sooner or later.” Most of the exporters I talked to came to the same conclusion: The Seattle-based titan now wants quality and design over generic products that compete solely on price and manipulation of ranking.

The Chinese government has taken note of the incidents. An official from the Ministry of Commerce compared the wave of store closures as Chinese exporters being “fish out of water” during a press conference in July.

“Due to differences in laws, culture and business practices around the world, [Chinese] companies are facing risks and challenges as they go overseas,” said Li Xingqian, director of foreign trade at the Commerce Ministry.

“We will help companies improve their risk control and comply with international trade standards.” Meanwhile, the official called for “the platform/platforms to cherish the important contribution from various companies and fully respect different trade entities.”

Data protection

And finally, China passed a sweeping data protection law this week that will strictly limit how tech companies collect user information, but the rules won’t likely have an impact on state surveillance. The regulation, which was proposed last year, will take effect on November 1. Read more about the rules here:

China roundup: Alibaba’s sexual assault scandal and more delayed IPOs

Hello and welcome back to TechCrunch’s China roundup, a digest of recent events shaping the Chinese tech landscape and what they mean to people in the rest of the world.

A sexual assault case at Alibaba has sparked a new round of #MeToo reckoning in China. Industry observers believe this is a watershed moment for the fight against China’s allegedly misogynist tech industry. Meanwhile, social media operators are still undecided on how to deal with the unprecedented public uproar against the powerful internet giant.

In other news, more Chinese tech companies have delayed plans to go public overseas after Didi’s fallout with Chinese regulators over its rushed IPO, including Tencent’s music streaming empire and one of China’s highest-valued autonomous driving startups.

Call for justice

Just past midnight last Sunday, an Alibaba employee posted on the company’s internal forum a detailed account saying her manager and a client had sexually assaulted her on a business trip. She took the case public after failing to obtain support from her superiors and human resources.

The post quickly made its rounds through China’s social media platforms. People stayed up blasting Alibaba’s ignorance, toxic business drinking, and the pervasive objectification of women in the Chinese “tech industry,” which has grown so far-reaching that it’s just the contemporary corporate world.

A day later, on August 9, Alibaba swiftly fired the alleged perpetrator. Two managers resigned and the firm’s head of HR was given a “disciplinary warning.” Alibaba’s CEO Daniel Zhang said he felt “shocked, angry and ashamed” about the incident and called on the company to work with the police to investigate the case.

This is arguably the most high-profile #MeToo case embroiling a major Chinese tech company by far and one that seems to have beckoned the toughest response from the company involved. Alibaba is formulating company policies to prevent sexual assaults, which surprises many that the global tech behemoth didn’t already have those in place.

The case managed to garner widespread public attention in China thanks to social media. Within the first few hours, it seemed as though discussion around the incident was propagating organically and uncensored on microblogging platform Weibo, in which Alibaba owns a majority stake.

But people soon noticed that despite the severity of the event, it took days before the case climbed to the top of Weibo’s trending chart, a bellwether for the most talked about topic on the Chinese internet. The perceived delay recalls Weibo’s censorship of an extramarital affair involving Alibaba executive Jiang Fan last year.

Talang Qingnian, roughly “Surfing Youth,” a social media column under state paper People’s Daily, blasted in an article:

The slow buildup of discussion again raised suspicion over whether Alibaba has manipulated public discourse.

Ever since the Jiang Fan case, the country’s attitude has been very clear that capital must not control the media.

As the basic infrastructure for truthful news in China, Weibo should not be a tool for any stakeholder to manipulate public opinion.

The article fanned up more public outrage but was soon taken down, likely because its wording was too strong. The Chinese state media apparatus is vast and only a few outlets, such as Xinhua, consistently convey top-level leaders’ official opinions. It’s not uncommon to see the less authoritative state-affiliated publications back down on reports that have cause backlashes. Last week, an article from a state-affiliated economic paper removed a piece calling video games “spiritual opium,” a loaded description that had earlier tanked the stocks of Tencent and NetEase, and republished the article with a softer tone.

Smaller war chests

Regulatory uncertainties have always been flagged as a risk by Chinese companies seeking overseas listings, but it was largely up to foreign investors to decide whether they were worthwhile investments. China’s recent regulatory onslaught on its tech darlings, however, has become a real deterrent for Chinese firms’ IPO dream.

This week, reports arrived that NetEase Music, a popular music streaming service, and Pony.ai, an autonomous vehicle startup last valued at $5.3 billion, have respectively postponed their plans to list in Hong Kong and New York.

Beijing has become warier of its data-rich companies getting scrutinized by U.S. regulators. Last month, the U.S. securities regulator said Chinese companies that want to raise capital in the U.S. must provide information about their legal structure and disclose the risk of Beijing’s interference in their business.

Many Chinese tech firms have learned from Didi’s fallout with the government, which had reportedly told the ride-sharing company to hold off on its listing until it sorted out a data protection framework. Didi went ahead regardless, triggering a government probe into its data practice and tanking its shares, which now stand at $8 apiece compared to $16 around its debut in early July.

Beijing’s crackdown has affected every major player in China’s consumer tech sector, wiping as much as $87 billion off the net worth of the country’s tech billionaires, including Pony Ma of Tencent and Colin Huang of Pinduoduo, according to Financial Times. The government wants “hard tech” like semiconductors and clean energy, so it has made it clear to future entrepreneurs where they should allocate their energy. The new generation of startups is listening now.

China roundup: Games are opium, algorithms need scrutiny

Hello and welcome back to TechCrunch’s China roundup, a digest of recent events shaping the Chinese tech landscape and what they mean to people in the rest of the world.

The question for the tech news cycle in China these days has become: Who is Beijing’s next target? Regulatory clampdowns are common in China’s tech industry but the breadth of the recent moves has been unprecedented. No major tech giant is exempted and everyone is being attacked from a slightly different angle, but Beijing’s message is clear: Tech businesses are to align themselves with the interests and objectives of Beijing.

Education curbs hit tech giants

The government’s motivation isn’t always ideological. It could lead to policies that rein in the unruly private tutoring sector in the hope of easing pressure on students and parents. Recent orders from Beijing have strictly limited after-school tutoring, though they also sparked a wave of sympathy for public school teachers who work at lucrative tutoring centers to compensate for their meager salaries.

The effects of the education crackdown are also trickling down to internet companies. For the past few years, ByteDance had been aggressively building an online education business through a hiring and acquisition spree in part to diversify an ad-based video business. Its plan seems to be in shambles as it reportedly plans to lay off staff in its education department following recent the clampdown.

The restraints are also hitting American companies. Duolingo, the language learning app, was removed from several app stores in China. While it’s not immediately clear whether the action was the result of any policy change, the government recently, along with its restraints on extra-curriculum, barred foreign curricula in schools from K-9.

Games are opium

It could be tricky to read the top leaders’ minds because their messages could come through various government departments or state-affiliated media outlets, carrying different weights.

This week, Tencent is in the authorities’ crosshairs. About $60 billion of its market cap was wiped after the Economic Information Daily, an economic paper supervised by China’s major state news agency Xinhua, published an article (which was taken down shortly) describing video games as “spiritual opium” and cited the major role Tencent plays in the industry. Shares of Tencent’s smaller rival NetEase were also battered.

This certainly isn’t the first time Tencent and the gaming industry overall were slammed by the government for their impact on underage players. Tencent has been working to appease the authorities by introducing protections for young players, for instance, by tightening age checks several times.

Tencent, which has a sprawling online empire of social networks, payments and music on top of games, has also promised to “do [more social] good” through its products. And following the recent op-ed from the state paper, Tencent further restricted the amount of time and money children can spend inside games. But after all, the company still depends largely on addictive game mechanics that lure players to open loot boxes.

Tencent share prices over the past six months. Image Credits: Google Finance

Fix the algorithms

The other camp of tech companies feeling the heat is those dependent on machine learning algorithms to distribute content. The Propaganda Department of the Chinese Communist Party, the country’s watchdog of public expressions, along with several other government organs, issued an advisory to “strengthen the study and guidance of online algorithms and carry out oversight over algorithmic recommendations.”

The government’s goal is to assert more control over how algorithmic black boxes affect what information people receive. Shares of Kuaishou, TikTok’s archrival in China, tanked on the news. Since its blockbuster initial public offering in February, Kuaishou’s stock price has tumbled as much as 70%. Meanwhile, the Beijing-based short video firm is shuttering one of its overseas apps called Zynn, which has caused controversy over plagiarism. But its overseas user base is also rapidly growing, crystalizing in one billion monthly users worldwide recently.

End of “two-choose-one”

The week hasn’t ended. On Friday morning, The Wall Street Journal reported that the country’s antitrust regulator is preparing to fine Meituan, China’s major food delivery platform, $1 billion for allegedly abusing its market dominance. In 2020, Meituan earned 114.8 billion yuan or $17.7 billion in revenue.

Until recently, forcing suppliers to pick sides had been a common practice in China’s e-commerce world. Alibaba did so by forbidding sellers to list on rivaling platforms, a practice that resulted in a $2.75 billion antitrust penalty in April. We will see where the government will act next as it continues to curb the power of its tech darlings.

China roundup: Keep down internet upstarts, cultivate hard tech

Hello and welcome back to TechCrunch’s China roundup, a digest of recent events shaping the Chinese tech landscape and what they mean to people in the rest of the world.

The tech industry in China has had quite a turbulent week. The government is upending its $100 billion private education sector, wiping billions from the market cap of the industry’s most lucrative players. Meanwhile, the assault on Chinese internet giants continued. Tech stocks tumbled after Tencent suspended user registration, sparking fears over who will be the next target of Beijing’s wrath.

Incisive observers point out that the new wave of stringent regulations against China’s internet and education firms has long been on Beijing’s agenda and there’s nothing surprising. Indeed, the central government has been unabashed about its desires to boost manufacturing and contain the unchecked powers of its service industry, which can include everything from internet platforms, film studios to after-school centers.

A few weeks ago I had an informative conversation with a Chinese venture capitalist who has been investing in industrial robots for over a decade, so I’m including it in this issue as it provides useful context for what’s going on in the consumer tech industry this week.

Automate the factories

China is putting robots into factories at an aggressive pace. Huang He, a partner at Northern Light Venture Capital, sees three forces spurring the demand for industrial robots — particularly ones that are made in China.

Over the years, Beijing has advocated for “localization” in a broad range of technology sectors, from enterprise software to production line automation. One may start to see Chinese robots that can rival those of Schneider and Panasonic a few years down the road. CRP, an NLVC-backed industrial robot maker, is already selling across Southeast Asia, Russia and East Europe.

On top of tech localization, it’s also well acknowledged that China is facing a severe demographic crisis. The labor shortage in its manufacturing sector is further compounded by the reluctance of young people to do menial factory work. Factory robots could offer a hand.

“Youngsters these days would rather become food delivery riders than work in a factory. The work that robots replace is the low-skilled type, and those that still can’t be taken up by robots pay well and come with great benefits,” Huang observed.

Large corporations in China still lean toward imported robots due to the products’ proven stability. The problem is that imported robots are not only expensive but also selective about their users.

“Companies need to have deep technical capabilities to be able to operate these [Western] robots, but such companies are rare in China,” said Huang, adding that the overwhelming majority of Chinese enterprises are small and medium size.

With the exceptions of the automotive and semiconductor industries, which still largely rely on sophisticated, imported robots, affordable, easy-to-use Chinese robots can already meet most of the local demand for industrial automation, Huang said.

China currently uses nearly one million six-axis robots a year but only manufactures 20% of them itself. The gap, coupled with a national plan for localization, has led to a frenzy of investments in industrial robotics startups.

The rush isn’t necessarily a good thing, said Huang. “There’s this bizarre phenomenon in China, where the most funded and valuable industrial robotic firms are generating less than 30 million yuan in annual revenue and not really heard of by real users in the industry.”

“This isn’t an industry where giants can be created by burning through cash. It’s not the internet sector.”

Small-and-medium-size businesses are happily welcoming robots onto factory floors. Take welding for example. An average welder costs about 150,000 yuan ($23,200) a year. A typical welding robot, which is sold for 120,000 yuan, can replace up to three workers a year and “doesn’t complain at work,” said the investor. A quality robot can work continuously for six to eight years, so the financial incentive to automate is obvious.

Advanced manufacturing is not just helping local bosses. It will eventually increase foreign enterprises’ dependence on China for its efficiency, making it hard to cut off Chinese supply chains despite efforts to avoid the geopolitical risks of manufacturing in China.

“In electronics, for example, most of the supply chains are in China, so factories outside China end up spending more on logistics to move parts around. Much of the 3C manufacturing is already highly automated, which relies heavily on electricity, but in most emerging economies, the power supply is still quite unstable, which disrupts production,” said Huang.

War on internet titans

The shock of antitrust regulations against Alibaba from last year is still reverberating, but another wave of scrutiny has already begun. Shortly after Didi’s blockbuster IPO in New York, the ride-hailing giant was asked to cease user registration and work on protecting user information critical to national security.

On Tuesday, Tencent stocks fell the most in a decade after it halted user signups on its WeChat messenger as it “upgrades” its security technology to align with relevant laws and regulations. The gaming and social media giant is just the latest in a growing list of companies hit by Beijing’s tightening grip on the internet sector, which had been flourishing for two decades under laissez-faire policies.

Underlying the clampdowns is Beijing’s growing unease with the service industry’s unscrutinized accumulation of wealth and power. China is unequivocally determined to advance its tech sector, but the types of tech that Beijing wants are not so much the video games that bring myopia to children and algorithms that get adults hooked to their screens. China makes it clear in its five-year plan, a series of social and economic initiatives, that it will go all-in on “hard tech” like semiconductors, renewable energy, agritech, biotech and industrial automation like factory robotics.

China has also vowed to fight inequality in education and wealth. In the authorities’ eyes, expensive, for-profit after-schools dotting big cities are hindering education attainment for children from poorer areas, which eventually exacerbates the wealth gap. The new regulatory measures have restricted the hours, content, profits and financing of private tutoring institutions, tanking stocks of the industry’s top companies. Again, there have been clear indications from President Xi Jinping’s writings to bring off-campus tutoring “back on the educational track.” All China-focused investors and analysts are now poring over Xi’s thoughts and directives.

China Roundup: Kai-Fu Lee’s first Europe bet, WeRide buys a truck startup

Hello and welcome back to TechCrunch’s China Roundup, a digest of recent events shaping the Chinese tech landscape and what they mean to people in the rest of the world.

Despite the geopolitical headwinds for foreign tech firms to enter China, many companies, especially those that find a dependable partner, are still forging ahead. For this week’s roundup, I’m including a conversation I had with Prophesee, a French vision technology startup, which recently got funding from Kai-Fu Lee and Xiaomi, along with the usual news digest.

Spotting opportunities in China

Like many companies working on futuristic, cutting-edge tech in Europe, Prophesee was a spinout from university research labs. Previously, I covered two such companies from Sweden: Imint, which improves smartphone video production through deep learning, and Dirac, an expert in sound optimization.

The three companies have two things in common: They are all in niche fields, and they have all found eager customers in China.

For Prophesee, they are production lines, automakers and smartphone companies in China looking for breakthroughs in perception technology, which will in turn improve how their robots respond to the environment. So it’s unsurprising that Xiaomi and Chinese chip-focused investment firm Inno-Chip backed Prophesee in its latest funding round, which was led by Sinovation Venture.

The funding size was undisclosed but TechCrunch learned it was in the range of “tens of million USD.” It was also the first investment that Kai-Fu Lee has made through Sinovation in Europe. As Prophesee CEO Luca Verre recalled:

I met Dr. Kai-Fu Lee three years ago during the World Economic Forum … and when I pitched to him about Prophesee, he got very intrigued. And then over the past three years, actually, we kept in touch and last year, given the growing traction we were having in China, particularly in the mobile and IoT industry, he decided to jump in. He said okay, it is now the right timing Prophesee becomes big.

The Paris-based company wasn’t actively seeking funding, but it believed having Chinese strategic investors could help it gain greater access to the complex market.

Rather than sending information collected by sensors and cameras to computing platforms, Prophesee fits that process inside a chip (fabricated by Sony) that mimics the human eyes, a technology that is built upon neuromorphic engineering.

The old method snaps a collection of fixed images so when information grows in volume, a tremendous amount of computing power is needed. In contrast, Prophesee’s sensors, which it describes as “event-based,” only pick up changes in the environment just as the photoreceptors in our eyes and can process information continuously and quickly.

Europe has been pioneering neuromorphic computing, but in recent years, Verre saw a surge in research coming from Chinese universities and tech firms, which reaffirmed his confidence in the market’s appetite.

We see Chinese OEMs (original equipment manufacturers), particularly Xiaomi, Oppo and Vivo pushing the standard of quality of image quality to very, very high … They are very eager to adopt new technology to further differentiate in a way which is faster and more aggressive than Apple. Apple is a company with an attitude which to me looks more similar to Huawei. So maybe for some technology, it takes more time to see the technology mature and adopt, which is right very often but later. So I’m sure that Apple will come at certain point with some products integrating event-based technology. In fact, we see them moving. We see them filing patents in the space. I’m sure that will come, but maybe not the first.

Though China is striving for technological independence, Verre believed Prophesee’s addressable market is large enough — $20 billion by his estimate. Nonetheless, he admitted he’d be “naive to believe Prophesee will be the only one to capture” this opportunity.

WeRide bought a truck company

One of China’s most valuable robotaxi startups has just acquired an autonomous trucking company called MoonX. The size of the deal is undisclosed, but we know that MoonX raised “tens of millions RMB” 15 months ago in a Series A round.

While WeRide is focused on Level 4 self-driving technology, it is also finding new monetization avenues before its robotaxis can chauffeur people at scale. It’s done so by developing minibusses, and the MoonX acqui-hire, which brings the company’s founder and over 50 engineers to WeRide, will likely help diversify its revenue pool.

WeRide and MoonX have deep-rooted relationships. Their respective founders, Tony Han and Yang Qingxiong, worked side by side at Jingchi, which was later rebranded to WeRide. Han co-founded Jingchi and took the helm as CEO in March 2018 while Yang was assigned vice president of engineering. But Yang soon quit and started MoonX.

Han, a Baidu veteran, gave Yang a warm homecoming and put him in charge of the firm’s research institute and its new office in Shenzhen, home to MoonX. WeRide’s sprawling headquarters is just about an hour’s drive away in the adjacent city of Guangzhou.

AI surveillance giant Cloudwalk nears IPO

Cloudwalk belongs to a cohort of Chinese unicorns that flourished through the second half of the 2010s by selling computer vision technology to government agencies across China. Together, Cloudwalk and its rivals SenseTime, Megvii and Yitu were dubbed the “four AI dragons” for their fast ascending valuations and handsome funding rounds.

Of course, the term “AI dragon” is now a misnomer as AI application becomes so pervasive across industries. Investors soon realized these upstarts need to diversify revenue streams beyond smart city contracts, and they’ve been waiting anxiously for exits. Finally, here comes Cloudwalk, which will likely be the first in its cohort to go public.

Cloudwalk’s application to raise 3.75 billion yuan ($580 million) from an IPO on the Shanghai STAR board was approved this week, though it can still be months before it starts trading. The firm’s financials don’t look particularly rosy for investors, with net loss amounting to 720 million yuan in 2020.

Also in the news

  • Speaking of the torrent of news in autonomous driving, vehicle vision provider CalmCar said this week that it has raised $150 million in a Series C round. Founded by several overseas Chinese returnees in 2016, CalmCar uses deep learning to develop ADAS (Advanced Driver Assistance System) used in automotive, industrial and surveillance scenarios. German auto parts maker ZF led the round.
  • Baby clothes direct-to-consumer brand PatPat said it has raised $510 million from Series C and D rounds. The D2C ecosystem leveraging China’s robust supply chains is increasingly gaining interest from venture capitalists. Brands like Shein, PatPat, Cider and Outer have all secured fundings from established VCs. Founded by three Carnegie Mellon grads, PatPat counts IDG Capital, General Atlantic, DST Global, GGV Capital, SIG China and Sequoia China among its investors.

Austin-based iFly.vc closes $46M second fund from legendary tech founders

To compete with the myriad venture capital firms in Silicon Valley, iFly.vc has a unique vantage point.

Its founder Han Shen has straddled the United States and China for several decades. He was the first hire on the investment team of Formation 8, the VC firm co-founded by Palantir’s Joe Lonsdale. After iFly.vc backed Weee! in a Series A round in 2018, Shen arranged for the grocery startup to meet with China’s produce delivery leaders — two of which recently went public in the U.S. — to learn what was applicable to the American market.

Weee! has since become the go-to grocery app for America’s Asian communities and raised hundreds of millions of dollars from Lightspeed Venture Partners, DST Global, Blackstone, Tiger Global and other major institutions. IFly.vc is still Weee!’s second-largest shareholder, and its first fund recorded a 10x rate of return, Shen told TechCrunch during an interview.

On the back of its cross-continental experiences and portfolio performance, iFly.vc recently closed its second fund with over $46 million, boosting the firm’s assets under management to more than $95 million.

The limited partners in Fund II include family offices across the U.S. and Asia as well as high-profile entrepreneurs such as Zhang Tao, founder of China’s Yelp counterpart Dianping, Free Wu, a founding member of Tencent who now manages Welight Capital, Joe Lonsdale, co-founder of Palantir, and Aayush Phumbhra, co-founder of Chegg.

IFly.vc made another big move during the pandemic, relocating its office from San Francisco to Austin, joining a wave of Californians fleeing the expensive area.

When it comes to investment focus, Shen said he tries to seek out the underdogs in North America’s trillion-dollar consumer market.

“On the one hand, enterprise services are growing very quickly. But on the other hand, the rise of enterprise software is helping consumer tech to grow even more quickly and easily. The consumer market is very diverse and serves an array of minority groups, so there is always a new opportunity.”

With this premise in mind, iFly.vc recently invested in Cheese Financial‘s seed round, a digital bank that started out by serving the underbanked Asian American populations.

IFly.vc prefers backing startups early on and seeing them through by providing hands-on, post-investment support. Rather than spray and pray, iFly.vc has invested in just about a dozen companies five years after its founding.

Shen’s background of growing up in China and working in Silicon Valley, where he eventually became a partner at Formation 8, led him to appreciate entrepreneurs with a similarly international background because they can learn from mistakes and successes on both sides. They also know how to leverage the different fields of talent across the world.

Cheese Financial, for instance, is setting up an engineering force in the founder’s hometown, Shenzhen, to take advantage of the Chinese city’s large pool of engineers at costs much lower than those of Silicon Valley.

It’s not just about hiring cheaper programmers, though. As Shen puts it: “In the past, American companies were simply outsourcing technical tasks to China. Now Chinese engineers actually have valuable lessons to bring to American companies because many have worked at large, successful Chinese tech companies themselves.”