The winds have changed for Chinese entrepreneurs. Xi Jinping is driving a crackdown on traditional software sectors like fintech, ecommerce, social media, and gaming. Policy is shifting incentives toward materials science, AI, biotech, and the like. The effects are everywhere: juggernauts like Alibaba and Baidu’s stock have fallen 23% in the past weeks, and venture capital appetite for Chinese consumer SAAS has pulled back severely. Jack Ma disappeared after a speech critical of the government, and numerous CEOs resigned, most notably Zhang Yiming of $400B Bytedance. Meanwhile, investment in hard tech is surging.
This breaks a 30-year trend of China aggressively growing its software industry. The Great Firewall gave Chinese startups a safe space to innovate and compete against one another without being disrupted by further-along Western players. From that Petri dish, extraordinary companies and products have emerged: today, US innovators look to WeChat and Pinduoduo for inspiration. Especially with the rise of TikTok, it seemed like we were on the cusp of Chinese consumer software taking over, and Silicon Valley moving to second place.
Xi has put the brakes on the global ascent of Chinese consumer SAAS. It’s a costly move for China, and raises an important question: is he right? Is it true that (1) consumer SAAS is less valuable than manufacturing and (2) the two are mutually exclusive to some extent?1