Jack Ma Crackdown Casts a Chill on China’s Tech Entrepreneurs

March 9, 2021

In barely 40 years, China has dramatically opened up its economy and become one of the world’s primary growth engines. Now, President Xi Jinping is making ambitious plans to pull ahead of rivals by turning his country into a digital powerhouse. But Xi’s drive toward tech dominance is being threatened by an unexpected speed bump: China’s forceful crackdown on Jack Ma’s business empire.

The abrupt fall from grace of the Alibaba Group Holding Ltd. co-founder has cast a chill over parts of China’s technology sector, according to local entrepreneurs and venture capitalists, even as Xi prepares to pour trillions of dollars into making the country self-sufficient in everything from semiconductors to software.

One startup founder in Ma’s home province of Zhejiang says he no longer aspires to Alibaba-size success, fearing the risk of unwanted government attention. Another says he’s stopped speaking in public and plans to focus on expanding his robotics business overseas. A venture capitalist who’s backed dozens of startups says the Ma saga will make entrepreneurs less aggressive, especially those who compete against state-owned companies. All three requested anonymity to speak freely about a politically sensitive subject.

“The Jack Ma incident could be a turning point” for China’s tech sector, says Rebecca Fannin, founder of research group Silicon Dragon Ventures.

There are proponents of the crackdown on Alibaba, Ant Group Co. (also founded by Ma), and other Chinese tech giants both in and outside the Chinese government who argue that it was necessary to snuff out monopolistic tactics and nurture innovation at startups that would otherwise struggle to compete. But interviews with more than a dozen Chinese founders and investors found widespread concern over the government’s lack of transparency and heavy-handed suppression of different opinions. Some suggest they will dial back their ambitions and think twice about entering strategically important industries.

“Facing the Chinese government is a trade-off between innovation and regulation,” says Lizhi Liu, an assistant professor at Georgetown University who’s researched e-commerce and economic policies in China. “It is difficult to strike the right balance: How much regulation is enough and how to avoid over-regulation that can dampen innovation and growth?”

Ma’s stature in China before the clampdown was hard to overstate. He was sort of like Bezos, Gates, and Steve Jobs put together, given how few successful Chinese founders there had been before Ma left his job as an English teacher to start Alibaba in 1999.

When the company made its debut on the New York Stock Exchange 15 years later in what was then the world’s largest initial public offering, it set off a gold rush among venture capitalists in China. They flooded startups with cash, boosting the value of deals in the country to $56.4 billion by 2015, from $5.2 billion in 2013, according to market researcher Preqin.

That money turbocharged China’s growth, helping the world’s second-largest economy become the first viable rival to the U.S. for tech leadership since the early days of Silicon Valley. By 2018, China pulled in essentially the same amount of venture money as the U.S. and created about the same number of unicorns, or startups worth at least $1 billion that haven’t gone public. Companies that emerged from the boom, such as ByteDance, Meituan, and Pinduoduo, have turned into some of the biggest names in global tech.

Now, however, Ma has become a cautionary tale. After he criticized China’s financial regulators in a speech last October, the government pulled the plug on Ant Group’s $35 billion IPO just days before it was due to take place. Beijing launched an antitrust investigation into Alibaba a few weeks later. Ma dropped out of public view, except for one carefully choreographed appearance in January where he promoted rural education—a policy priority for China’s Communist Party. Rumors about Ma’s status continue to swirl, even though he was spotted playing golf as recently as last month.

The founder from Ma’s home province says he and other local entrepreneurs no longer discuss him in their WeChat group. Before the crackdown they would regularly celebrate the billionaire, China’s fourth-richest man, as Ma Laoshi, or “Teacher Ma.”

But the founder and his management team have now concluded that Ma isn’t an isolated case. So they’re steering clear of services that could hit a nerve in Beijing and plan to hire more specialists in government relations. Salespeople have been told to stop calling the company “the biggest” or “the best” in the industry to avoid unwanted attention.

“The government says that private enterprises play an important role in China’s economy and that they will support us with all their heart, but the reality is that the government doesn’t trust private enterprises,” the founder says. Beijing officials didn’t respond to a request for comment.

Another entrepreneur who runs a software startup says he’s cozying up to the government to protect his company. He’s invited state-owned investment funds to buy stock, perhaps even a majority stake. The founder, who also asked for anonymity for fear of reprisal, says he thinks it’s inevitable that government bureaucrats will take control of companies like his.

The venture capitalist says Beijing’s antitrust crackdown may have a positive impact on startups in the short term because they won’t have to worry as much about getting crushed by giants such as Alibaba or Tencent Holdings Ltd. But over the long term, he says, government interference will hurt growth and innovation.

The industry’s wariness stems in part from the fact that modern China has never been through anything like the current situation. The private sector is so new, growing out of Deng Xiaoping’s reforms starting in the late 1970s, that it lacks any precedent for antitrust reviews. It doesn’t help that authorities have given little guidance on how to interpret the new regulations.

China has sought to reassure entrepreneurs in recent weeks, with mixed success. One state-owned newspaper praised Tencent’s Pony Ma, Huawei Technologies’ Ren Zhengfei, Xiaomi’s Lei Jun, and other billionaire founders for breathing “new life into China’s economic reforms.” Jack Ma—by far the nation’s most famous businessman—wasn’t mentioned.

“The Jack Ma incident shows that nobody is safe,” says the entrepreneur who’s spending more time on overseas expansion. “As an old saying goes: ‘Accompanying a monarch is like accompanying a tiger.’ You cannot predict when the tiger will turn against you.”

Source: Bloomberg
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