Over the past few months we’ve taken a look at what China’s cleantech industry hopes to achieve in the race to reach carbon neutrality. We’ve focused on specific technologies, promising technologies, and government plans. 

Now, in the last edition of our cleantech newsletter series, we ask: where is the money coming from?

China has long been synonymous with pollution. The country’s journey from an agrarian society to an industrialized one took decades, rather than centuries. The cost of this speed is polluted waterways, smog-filled skies, and contaminated soil. 

Since the early 2000s rampant industrialization has slowly (mostly very slowly) been giving way to the notion that sustainability, rather than growth at all costs, should be a priority.

The move to cut emissions came to a head in September last year when China’s current president, Xi Jinping, announced plans to reach peak carbon emissions by 2030 and carbon neutrality by 2060. 

It had a marked effect. When the Chinese government backs an agenda, it ripples through society—and completely transforms industries. Xi’s pledge has led China’s companies to publish carbon neutrality plans, pledge to cut emissions, and look to find ways to fund green initiatives. 

So what’s next for cleantech in China? In the last edition of this newsletter we look into the money side of the industry. Companies are exploring ways to raise money to back their ambitious plans to go green through innovative methods such as green bonds, green VC and carbon markets.

Ambitious pledges

Since Xi’s speech, some of China’s biggest tech companies have released plans to reach carbon neutrality—without much detail. This is likely to continue as governments, both local and national, exert pressure on firms as carbon deadlines near, requiring them to fund their own green transformations. The promises create some accountability, allowing the public to hold them to their stated goals. 

Alibaba-affiliate Ant Group has vowed to hit carbon net zero by 2030. JD Logistics and Baidu have pledged to go completely renewable by the same year. Tencent has announced that it has a plan for eventual carbon neutrality, without a timeline. 

But none have laid out concrete plans detailing how they will reach these goals. Key to reaching carbon neutrality will be lowering their carbon emissions in data centers. In China’s competitive tech sector, data is power—but it also requires a lot of electricity..

In 2018, data centers in China used 161 terawatt-hours (TWh) of electricity, according to 2019 research by Greenpeace and the North China Electric Power University. That’s enough to power a mid-sized nation, and is four times higher than New Zealand’s total energy consumption in 2018. 

If the electricity came from renewable sources, this wouldn’t be a problem. For the most part, it doesn’t, and increasing the amount of renewable energy tech companies use will be a significant focus in the next few years.

The rise of Chinese green bonds

Developing new technologies is expensive. But so is going green. Chinese companies are looking for ways to fund their environmentally friendly initiatives.

One answer is green bonds, in which companies sell bonds to finance eco-friendly projects. They’re not new in China, but they are novel among Chinese tech companies. This avenue of funding could provide a way for China’s big tech company to go green without taking money out of their R&D coffers.

Baidu is one of the first tech companies to go this way. Earlier this month, the company raised $1 billion in a green bond sale, the proceeds of which could be used to build energy-efficient data centers and office buildings, electric self-driving cars, and greening its supply chain, all of which were key features in a carbon neutrality plan the company released in June.

Baidu is not alone. More broadly, Chinese companies are looking at the green bond mechanism. Between April and June this year, companies in China issued more green bonds than in the previous two years, reaching $18.1 billion, according to the Climate Bonds Initiative. 

But a review of how these bonds work is needed to make them more effective. Guidelines from China’s central planner allow up to half of the money raised from these green bond sales to be used for purposes other than sustainability projects, which could make “greenwashing” a systematic problem.

The green VC

Not every company can sell bonds to fund green expansion plans. For cleantech startups, raising money is key, and several VCs in China are looking for the next big thing in environmentally friendly technology. China-focused VCs are signalling that they are gearing up for new rounds of cleantech investments, which could lead to a boom in the industry.

In March, cleantech company Envision Group and venture capital firm Sequoia Capital China set up a carbon neutrality tech fund worth RMB 10 billion (around $1.5 billion). “The fund will cooperate with enterprises and governments to create a carbon-neutral technology innovation ecosystem,” the companies said in a statement. 

Also in March, GCL Energy Technology and CICC Capital, an arm of China Capital Investment Group, launched a RMB 10 billion fund. The fund will focus on decarbonizing the auto sector and will raise around RMB 4 billion in its first phase, China Daily reported on March 31. 

Another venture investor is Tsing Capital. The firm has backed a slew of startups that have become household names in cleantech, including drone maker eHang, China Hydro, and US-based Lucid Motors.

While these are small compared to the government-backed funds in China, they do point to a larger trend of venture capital firms and corporate VCs looking to back upcoming cleantech companies that aim to solve novel environmental issues. 

Expanded carbon market

In July, China launched its long-awaited national carbon trading platform, expecting 2,000 power stations to take part in the first phase of trading. It didn’t work out quite as planned: the government gave out too many credits and the price of each credit has fallen below the amount they were trading at when the exchange first opened. 

If expanded and reformed, the carbon trading platform could significantly reduce Chinese companies’ carbon emissions and create a way for them to make green plans profitable by selling off excess carbon credits. 

Currently, China’s trading scheme has no cap on how many emissions permits can be bought and sold. “The Emissions Trading Scheme, as it is currently designed, will have a very marginal impact on [reducing] emissions,” said Li Shuo, a policy adviser at Greenpeace China. “A cap-and-trade system without absolute emissions-based trading benchmarks is a convoluted exercise.” 

Officials appear to be open to changing the way the system works over time, so long as it doesn’t put too much financial pressure on businesses. In the next few years, reforming the system and putting caps in place, while also opening the market up to companies outside of the energy sector, could have more of an effect on carbon emissions in China. 

Baidu practically owns search in China, controlling nearly 80% of the sector. Its closest competitor, Sogou, holds just 11%. There’s just one problem: web search isn’t the cash cow it used to be, and Chinese internet users now spend more time in apps.

Advertising revenue is the primary source of income for search companies, and Baidu’s ad business has seen growth slow to a crawl over the past few years, with a few quarterly exceptions. The AI giant has been hamstrung by the decline of web search, rising competition from rivals like ByteDance and Alibaba, and accusations of bad behavior like prioritizing its own search results and allowing ads for questionable medical treatments. 

The company is trying a full-blown pivot, even telling people it’s no longer a search company. The story it’s telling now is about AI.

“As we enter 2021, Baidu is well positioned as a leading AI company with a strong internet foundation to seize the huge market opportunities in cloud services, autonomous driving, smart transportation, and other AI opportunities,” Baidu CEO Robin Li said in the company’s fourth-quarter earnings report. 

And it could be working. Baidu’s new businesses have grown and the company’s investments in new technologies are starting to mature. In 2018, non-ad revenue made up just 17% of its sales. Now, more than a third of the company’s revenue comes from its other businesses, including enterprise services like AI cloud and its consumer-facing smart speaker business.

Bottom line: Baidu really is changing. It still gets most of its revenue from search and advertising, but cloud services are driving growth and now account for a substantial part of revenue. The company’s long-term plays on AI and autos could pay off in a few years. 

Search in decline

Beginnings in search: Founded in 2000 as a search engine, Baidu quickly became a household name, growing alongside China’s ballooning internet population. At the time, there were just 22 million internet users. 

Ten years later, that number was nearly 460 million—and Baidu’s search business was booming. Between 2009 and 2010, the company’s ad sales increased by nearly 75% to reach RMB 7.9 billion.

Along with Alibaba and Tencent, Baidu was synonymous with big tech in China: the three companies were collectively known as BAT, much like FAANG—Facebook, Amazon, Apple, Netflix, and Google—in the US.

A staggering giant: But in the last few years growth has mostly slowed. In 2020, Tencent overtook Baidu in digital ad revenue for the first time, according to market research firm eMarketer. Analysts now typically count Baidu out of the tech major leagues in China, even proposing that ByteDance replace the company in the BAT triumvirate. 

• “Baidu has had trouble attracting search ad dollars,” eMarketer forecasting writer Ethan Cramer-Flood, wrote last year. “Advertisers are showing that they increasingly prefer the reliability of Alibaba’s platforms for their search spend,” he said, referring to the ads Alibaba serves directly on its e-commerce platforms.
• The company has faced a slew of challenges, including issues of trust, decreasing dividends as the number of new people using the internet slows, and increased competition from rivals. 

Slowing search: Web search in general has declined, and information is often confined within apps. Internet users now engage more with content in WeChat, Xiaohongshu, and Douyin.

• Instead of using search engines to find information on the internet, users spend more time looking for information in WeChat, browsing products on social networks and livestreaming platforms like Douyin and Xiaohongshu, and services on Meituan. There’s just not a lot of profitable search left. 

In the first quarter of 2019, Baidu reported a quarterly net loss for the first time since it went public in 2005.

• “Given the current macro conditions, tighter government scrutiny on content, cutbacks from the VC community and so forth, we are taking a cautious view that online marketing in the near term will face a more challenging environment,” Li said during the company’s Q1 2019 earnings call. 
•  In the second quarter of the same year, the company’s revenue growth flatlined. Since then, with the exception of the first quarter of 2021, the company’s revenue growth has stagnated or declined.
• Baidu, like many others in China, was hit by the Covid-19 outbreak at the beginning of 2020. 

Advertising’s not out: While the proportion of revenue that comes from advertising has shrunk, it still currently makes up the majority of Baidu’s total—and search encompasses a large part of that. 

The company currently makes money by selling ads that get displayed with search results or on other platforms like newsfeed and search app Baidu App and Reddit-like community platform Baidu Post.

The company’s mobile ecosystem, which includes Baidu App, user-generated, medium length video platform Haokan, and Baidu Post, is a large driver of its growth, Baidu said in its Hong Kong IPO prospectus.

• “We generate revenue primarily from providing search, feed, and other marketing services, which account for a majority of our total revenues,” Baidu said in the prospectus. 
• Baidu App had 544 million monthly active users in December. The app aggregates content and services from third-party apps and websites.

Seeking new growth

Baidu is betting on two new areas to secure growth: cloud services; and “other” initiatives, including intelligent driving, mapping, smart devices, and AI chips.

Li said that non-ad businesses, including cloud and its other growth initiatives, could become its primary source of income over the next three years during Baidu’s May earnings call. 

Baidu, the cloud company? Cloud services drive a major portion of Baidu’s current growth. The company restructured in 2018 to place greater emphasis on cloud computing and artificial intelligence. In an internal note at the time, Baidu’s Li wrote that the company sees these businesses as the cradle of “new growth engines.”

• The company provides several cloud products, including storage space, computing power and cloud-based software services, as well as several AI and big data products for speech recognition and synthesis, facial recognition, and image recognition.
• Collectively, these platforms allow developers and companies to access computing and power and storage that can process information that they might not be able to handle on their own computers or servers.
• Baidu’s AI cloud services also give users access to AI tools and components and pre-trained machine learning models.
• At the end of 2020, Baidu was China’s fourth largest public cloud provider, according to market research firm Canalys, driven by growth in government, enterprise, transportation, and healthcare sectors.
• The company has attributed much of its non-ad business growth to its cloud business. In the first quarter, revenue from its non-ad businesses was up 70% year on year, driven primarily by “cloud and other services,” Baidu said. 
• Revenue from AI cloud reached RMB 2.8 billion, up more than 50% year on year, equivalent to half of the company’s non-ad revenue for the quarter.

What’s next for Baidu?

Push for AI: Baidu has invested heavily in AI since 2010, hoping that it will propel future initiatives like intelligent and autonomous driving. The technology is currently used in the majority of the company’s products, including its cloud and search businesses. 

• Baidu has more AI patents than any other company in China, according to a report by the China Industrial Control Systems Cyber Emergency Response Team and the Electronic Intellectual Property Center, two units under the Ministry of Industry and Information Technology.
• The company released an open source deep learning platform called PaddlePaddle in 2016, a framework to rival Google’s Tensorflow and Facebook’s PyTorch. In April, it released PaddlePaddle 2, an updated version of the framework. Paddle Paddle has been forked 4,000 times on Github, while PyTorch has been forked 13,500 times. 
• Baidu has also released natural language processing framework Ernie, a technology that helps computers understand and process speech. 

Taking on chips: AI is only as effective as the hardware it runs on. In 2018, Baidu announced that it was developing its own AI chip. 

• By 2019, Baidu’s first chip, dubbed Kunlun, was being used in its cloud servers to optimize “visual, speech, natural language processing, and other AI capabilities.”
• The company has since been developing the Kunlun 2, and spun off its chip unit. 
• In April the unit completed its first round of financing, valued at $2 billion. 
• Baidu’s AI chips are also used in its automotive businesses, including intelligent and autonomous driving. 

Future mobility: Projects related to autonomous vehicles and robotaxis make up a significant portion of Baidu’s bet on future revenue. The company hasn’t yet made its own cars. Instead, it’s been focusing on a self-driving package called Apollo it hopes other automakers will license and put in their own vehicles.

• Baidu has been testing Apollo on China’s streets for years. The company has accumulated 4.3 million test miles and been granted 199 autonomous driving licenses, as of December 2020. 
• The company has signed agreements with 10 Chinese automakers to deploy its Apollo self-driving services in their cars.
• These services currently include high definition mapping, automated valet parking, and semi-autonomous driving. As the technology matures, Baidu hopes to extend Apollo to include fully autonomous capabilities. 
• Apart from partnering with companies, Baidu has also teamed up with several local governments to provide robotaxi services, including southern China’s Guangzhou, Beijing and nearby Cangzhou, as well as Changsha in central Hunan province, and the southwestern municipality of Chongqing. 
• The company hopes that its early lead in autonomous driving in China will help it become a frontrunner in commercializing the technology. 

Bets on electric: Baidu is also making moves into China’s crowded electric vehicle industry. In April, the company partnered with automaker Geely to produce smart EVs. 

• The joint venture, dubbed Jidu, plans to spend RMB 50 billion over the next five years to develop smart car tech. 
• The two companies plan to launch their first vehicle in the next three years, Bloomberg reported. 
• “Partnering with China’s largest homegrown auto brand might help Baidu expand its ecosystem as it competes with other internet giants like Tencent and Alibaba,” Bloomberg Intelligence analysts Steve Man and Joanna Chen wrote. 

Is the pivot working?

So far, so good: Since the company has decided to go all-in on AI, its year-on-year growth has increased dramatically, but this may also be as a result of China’s Covid-19 recovery. 

• First quarter revenue reached RMB 28.1 billion, up 25% year on year. Nevertheless, the company’s revenue from the first quarter of last year was down significantly as a result of the fallout from the Covid outbreak in China. 
• At the same time, Alibaba saw its revenue grow by 22% and Tencent grew 25%. 
• Baidu CFO Herman Yu attributed the growth to “non-advertising revenue growing 70% year over year.” 
• On an earnings call, Yu said that the company’s AI businesses have started to mature and generate revenue. “You’re seeing us really starting with our firing power for our non-advertising AI businesses that we have incubated over the last decade,” he said.

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 are joined by Kendra Schaefer, partner at Trivium China and head of the firm’s tech practice. They dig into the ever-evolving saga at Didi, whose decision to go through with a US IPO against Beijing’s wishes has brought about waves of regulatory wrath against the ride-hailing and mobility giant. Kendra’s insights are helpful for investors, analysts, or anyone hoping to understand the new rules of the road for China’s tech firms.

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

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

Guest:

• Kendra Schaefer – @kendraschaefer

Editor:

• Peter Isachenko

Podcast information:

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

Renewables can produce an almost limitless supply of energy—but only sometimes. The result is that, even if 40% of your installed capacity is renewable, on a cloudy, windless day the majority of your power could come from coal.

To combat this problem, energy needs to be put in the bank when you have too much, so that it can be used when there is too little renewable power being generated. 

By the end of 2020, China had installed 500 million megawatts of solar and wind capacity—the equivalent to 15 billion solar panels or 206,000 utility-scale wind turbines. In the next decade, the country wants to double that figure.

This renewable drive forms part of China’s goals of reaching carbon neutrality by 2060. The country aims for renewable power to account for 50% of its total installed electrical capacity by 2025, up from 42% this year (in Chinese). 

But just 0.7% of all the solar and wind power China creates can currently be stored. As the country moves to increase its share of renewable energy, the government is taking action to allow energy storage to keep up. 

The National Energy Administration this year mandated that new renewable projects need to include energy storage capacity. Regional governments including those in Hunan, Qinghai, Inner Mongolia, and Guizhou have created similar mandates. New renewable projects need to be able to store at least 5% of the energy they produce in these areas. 

For China, deploying energy storage systems is crucial for renewables to compete with fossil fuels. China’s energy administration set the country’s first national target for new energy storage earlier this year, aiming to increase the country’s current capacity nearly eightfold to 30GW in 2025 from 3.8GW last year. 

There’s no golden ratio of renewables to energy storage. Experts are mostly talking about how much energy storage will have to cost in order for countries to go 100% renewable.

In this week’s newsletter we take a look at how energy storage works, and how it forms an important piece of China’s carbon neutrality puzzle. 

The major types

The government is leading the charge in rolling out energy storage facilities, with state-owned utility companies building out the majority of capacity. The private sector, including battery makers like BYD and CATL, are involved in smaller, localized facilities. 

In China, the most widespread form of energy storage is pumped hydro, making up more than 90% of all storage capacity. But other forms of energy storage, such as batteries, flywheel, and compressed air storage, are catching up as the country’s wind and solar installations grow.

Storage methods like pumped hydro are not as efficient as batteries, but that might not matter as energy from these sources could become abundant at peak production times. 

The power of water: Pumped hydro is a form of storage that allows power to be saved by pumping water from a low-lying reservoir to an elevated one when electricity demand is low. The water can then be released to generate electricity when demand is high.

• In 2019, China installed more than two-thirds of the world’s new pumped hydro capacity. During the same year, the country’s total pumped hydro capacity reached 30GW, according to the International Hydropower Association.
• Pumped hydro’s use is slowly declining as the use of batteries for energy storage increases, the China Energy Storage Alliance (CNESA) said in a report last year.

Electrochemical storage: Of the numerous ways to store energy, batteries are one of the most important for storing energy from wind and solar farms. The batteries are much like the ones you find in electric vehicles, your phone or your computer, only much larger in scale.

Some of the world’s biggest battery makers are Chinese. Growing off the back of the county’s electric vehicle (EV) push, BYD and CATL, which predominantly make batteries for EVs, have started making major inroads into energy storage.

Earlier this month CATL signed a deal with gas utility Towngas to set up a joint venture to install energy storage systems in industrial parks. BYD and CATL provide commercial and grid-scale energy storage systems for renewable sources.

• Battery storage makes up 6.8% of the county’s storage capacity. 
• There are various forms of batteries, which largely vary based on what they’re made of and how they’re used. For instance lithium-ion batteries are used in electronic devices and electric vehicles, while larger flow batteries are used in heavy industries.
• Batteries are the most efficient store of energy but they’re also the dirtiest, requiring huge mining operations for raw materials and recycling programs at the end of their life cycles. 
• They’re also expensive, but costs are falling. Since 2012, the cost of lithium-ion storage systems have fallen by 75%, according to CNESA. 
• These sorts of batteries are produced on EV battery manufacturing lines.
• According to IHS Markit, lithium-ion batteries are “best positioned to scale up” out of all others, given China’s EV push. 

Emerging contenders 

Pumped hydro and batteries make up the majority of energy storage capacity in China, but there are other technologies state planners have earmarked that haven’t yet taken off.

Motion batteries: While still limited in their use, flywheels have been highlighted by China’s government as an effective way to store energy. These devices store rotational energy by spinning heavy wheels at high speeds.

• In most cases, electricity is used to speed up the wheel. Energy is removed from the system by engaging a turbine-like device, which slows the wheel down. 
• On July 23, China’s state planner, the National Development and Reform Commission, laid out plans to nearly double new energy storage capacity, which includes batteries, compressed air, and flywheels, among others.
• In 2016, Tsinghua University and Sinopec developed a flywheel energy storage prototype whose capacity was more than 1 megawatt.
• Last year, a flywheel energy storage system was connected to the grid in the northern Chinese city of Shenyang. 
• Currently experimental, these “mechanical batteries” make up less than 0.01% of China’s storage capacity.

Compressed air: Using compressed air to store energy goes back decades, but it is still seen as an effective way to stockpile energy. Electricity is used to compress air, often in large underground chambers. When energy is needed, air is released to drive a turbine that creates electricity. 

• Compressed air makes up 0.03% of China’s storage capacity. 
• The storage medium is clean when renewable sources are used to compress the gas that is later released. 
• “Compressed air energy storage technology holds many advantages such as high capacity, low cost, high efficiency, and environmental friendliness. For these reasons, it is one of the most promising large-scale energy storage technologies,” CNESA said in 2020. 

As locations for pumped hydro become more difficult to find, China is likely to deploy a lot more batteries to store energy over the next five years. But batteries present a problem in the long term: they’re dirty and battery recycling has yet to really take off. It will be worth keeping an eye on flywheels and compressed air as China pushes toward carbon neutrality. 

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 Emma Lee back to discuss MissFresh and Dingdong Maicai. Key topics include what grocery e-commerce is, who the players in the space are, how they are different, and more. Elliott and James also discuss Didi Global. The conversation with Emma Lee was recorded on July 1, 2021 and the rest of the episode was recorded on July 2, 2021. 

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

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

Guest:

• Emma Lee – TechNode

Editor:

• Peter Isachenko

Podcast information:

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

“We are now in a golden era for hydrogen,” Robin Lin, CEO of fuel cell producer Refire, declared during a speech at the China Auto Forum in Shanghai last year. 

Lin would know. His company made fuel cells before they were cool. When Refire was founded in 2015 it was a small, specialized market. 

But over the past two years, its prospects have exploded. Hydrogen technology is fast gaining attention in China as a viable alternative to the fossil fuels used in vehicles and heavy industries. Fuel cells are a dense, efficient, and clean way to store energy. Among the most popular prospects at the moment are fuel cell electric vehicles (FCEVs).

To proponents, hydrogen is the future of green fuel. Compared to gasoline, it emits only water. Compared to batteries, it leaves nothing to recycle.

China’s push for hydrogen energy looks much like its ambitions for electric vehicles when they were first set out. The country’s nascent hydrogen drive has led to an increasing number of companies researching and developing hydrogen technologies.

The expanding market has led to a series of hydrogen companies, including Refire, filing to go public. In March, Refire filed to list on Shanghai’s Nasdaq-like STAR Market. 

For this week’s newsletter, we profile one of the Chinese companies that stand to benefit most from China’s push for hydrogen.

Taking on an industry

Refire is one of China’s largest fuel cell manufacturers. The company produces fuel cell systems, the heart of FCEVs, for commercial vehicles, which require large amounts of power and quick refueling times—both strengths of fuel cells compared to batteries. 

Established in 2015, Refire designs and manufactures a range of fuel cell systems for heavy vehicles of up to 49 tons, including mixer trucks, buses, dump trucks, and truck tractors. It’s customers include trucks maker FAW Jiefang, auto manufacturer Dongfeng, and busmaker Yutong.

Refire declined to comment for this story, citing a pre-IPO quiet period.

The company began mass producing its first fuel cell system for light-duty commercial vehicles in 2017, manufacturing 1,000 within 18 months. The company has since launched a new line of fuel cell systems, the most powerful of which can drive heavy-duty vehicles.

While not widely adopted, Refire’s fuel cells have been deployed commercially in 2,700 vehicles in 15 cities across China, and have collectively driven more than 63 million kilometers, according to the company. Refire currently produces around 1,000 fuel cell systems a year, used by automakers in buses and trucks. For comparison, the Beijing government aims to deploy 10,000 fuel cell vehicles on its roads by 2024.

The company has set up two manufacturing plants, one in the southern Chinese province of Guangdong and the other in Jiangsu, in eastern China. Both aim to drastically increase capacity. The company expects to initially build 20,000 fuel cell systems a year at the new Jiangsu plant. 

Commercial focus

As China starts to promote hydrogen fuel cell vehicles with more fervor, heavy vehicles will likely be the initial focus. China’s policy environment currently favors using fuel cells in commercial vehicles rather than passenger cars, Yuki Yu, founder of consultancy Energy Iceberg, told TechNode in April. 

Commercial vehicles have the strongest case for hydrogen fuel cells over electric batteries. These vehicles have higher utilization rates than passenger cars, and can’t spend hours parked while charging. 

Commercial vehicles are likely to see pressure to go green. China has ambitious goals to reach peak carbon emissions by 2030, and transportation could become a major focus for lawmakers. In the first half of 2020, trucks made up just 10% of all vehicles in China, but are some of the largest polluters on the road. “Heavy trucks account for one-third of China’s total road carbon emissions,” Refire’s Lin said during the Yangtze Delta Forum in April. 

Refire has forged a series of high-profile partnerships to increase adoption of fuel cell technology.

In July 2019, Japan’s Toyota Motor Corp. signed a deal with Chinese commercial vehicle makers FAW and Higer bus, with Refire acting as a local supplier. As part of the deal, Refire ensured that the components of the fuel cell systems functioned together and was responsible for developing fuel-cell powertrains that China automakers could use in hydrogen buses, Reuters reported at the time. 

Then, in April, the company partnered with German automotive supplier Schaeffler to “explore the key areas of fuel cell technology” and set up a knowledge base and shared resource platform. Other partners include oil and gas giant Sinopec, which has also invested in Refire.

Finances

In early March, Refire filed to list on Shanghai’s STAR Market, with plans to raise more than RMB 2 billion ($309 million). 

The company’s valuation has increased significantly over the past few years following several rounds of fundraising. In 2019, motor manufacturer Broad-Ocean announced plans to acquire 20% of Refire for RMB 300 million, valuing the company at RMB 1.5 billion. Broad-Ocean later pulled out of the deal. 

The company’s filing comes just months after competitor SinoHytec floated in Shanghai in August. 

“Since SinoHytec went public, Refire has been raising funds at a quarterly pace, which shows that the capital market is enthusiastically seeking hydrogen energy companies that are close to IPO,” China-based hydrogen fuel cell research center The Orange Club wrote in a September report. 

But Refire losses have expanded dramatically. Between 2017 and 2019, the company’s losses ballooned nearly sevenfold from RMB 35 million to RMB 278 million, narrowing to RMB 150 million in the first nine months of 2020, according to its prospectus

Refire’s losses were primarily driven by R&D costs, which was equivalent to 90% of the company’s operating income between January and September 2020. 

Challenges

While China’s government is laying down the groundwork to commercialize hydrogen ftechnology, there are significant hurdles to unlocking its potential and delivering Refire’s zero-emissions goals.

Unlike electric vehicles which have a vast network of charging stations, hydrogen cars are still in their infancy and refuelling stations will likely be hard to come by in the next few years. 

Sinopec has made pledges to address this, and plans to build 1,000 hydrogen refueling stations that also sell conventional fuels by 2025. The company currently runs more than 30,000 gas stations across China. 

Meanwhile, hydrogen fuel cells are only as clean as the process used to isolate the gas. Currently, more than 80% of hydrogen is produced using natural gas or coal, meaning that carbon is released during the isolation process. “Green hydrogen,” which is produced using energy from renewable sources, is currently very expensive, though an increasing number of projects are being launched. 

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.

It’s another earnings episode, so the guys welcome Michael Norris back to the show. They discuss the quarterly earnings of Baidu, Tencent, and JD, while also answering questions from listeners. Key topics include what a new era in tech regulation means for stocks.

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

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.

In this episode, James and Elliott are joined for the second time by Bloomberg tech reporter Zheping Huang. They discuss what the future has in store for ByteDance now that their founder Zhang Yiming is no longer in the CEO role. Zheping and his colleagues recently completed a six-part podcast series chronicling the rise of ByteDance’s Tiktok in the US, and the Trump administration’s attempts to ban it. 

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

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

Guest:

• Zheping Huang – @pingroma

Editor:

• Peter Isachenko

Podcast information:

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

“Achieving carbon neutrality may need trillions of yuan in investment and decades of continuous effort,” Zhang Lei, founder of Hillhouse Capital said during a speech in mid-March (in Chinese). 

Zhang was speaking at the China Development Forum in Beijing, an event attended by high-level officials from China and abroad. It’s a pretty big deal, and the first major international conference that’s held after the conclusion of the Two Sessions, China’s biggest annual political meeting.

“…As a VC/PE organization, we have to be involved in something this big,” the investor and entrepreneur said, referring to China’s push to cut carbon emissions—a major theme at the event. 

Hillhouse Capital, the venture firm Zhang founded in 2005, has invested in some of China’s biggest tech firms, including JD.com, Tencent, and Meituan. It’s the kind of investor most startups dream of attracting. 

Typically, the Chinese government has been the largest driver of cleantech investment. For years, it has implemented massive subsidy systems for clean energy generation, including solar and wind, to drive adoption of these power sources. 

As the government pushes carbon neutrality, venture capital firms are increasingly setting up cleantech-focused funds to back novel companies trying to solve the emissions puzzle. 

It’s a common pattern—the state goes in first, and the market follows. It works, but at a cost, leading to wasteful investment as investors pile into the latest hot industry. 

Government takes the driver’s seat

In the past, China’s government has put its own money behind promising low-carbon industries. The investments act as a seal of approval, leading to a flood of private funding.

In 2016, China’s investments in renewable energy and energy efficiency reached $167 billion. This accounted for 55% of its total spending on energy, higher than the global average of 33%, according to a report by researchers at the Energy Foundation China and the University of Maryland.

Last year, the country’s first public fund dedicated to investing in green projects and companies raised RMB 88.5 billion ($13.84 billion). In July, China’s finance and environment ministries set up the fund, which aims to support the transformation of the country’s economy and increase the role of the market in fighting emissions, though it has not yet formally launched. 

The planned National Green Development Fund’s 26 mostly state investors include some of China’s biggest banks, companies, and several provincial governments. The fund is preparing to start business rapidly. It is setting up an investment management unit and plans on making a “sizable” number of hires as it prepares to launch later this year, AsianInvestor reported, citing sources close to the matter.

China’s banks have typically been major financiers of cleantech projects, specifically those involving energy generation, energy efficiency, and waste management. 

One example is China Industrial Bank (CIB). According to a report by German environmental consultancy Adelphi, CIB was the first bank in China to “embrace sustainable development and green finance.” The company has focused on financing renewables, clean transportation, as well as water and wastewater management. 

In 2017, the bank’s green financing portfolio reached more than RMB 674 billion. 

Venture capital funds have taken note. Globally, cleantech startups raised a record $17 billion in venture capital funding in 2020, with the US and China making up the bulk of that total, according to a report by BloombergNEF. 

“The majority of this investment was in late-stage startups from a variety of new climate-tech funds, resident clean-tech funds and corporate venture capitalists,” the report said. 

The bulk of cleantech investments in China during 2020 were focused on the transportation sector, according to PwC. “One reason for the significant imbalance here is the Chinese automotive sector is relatively young, so much of the investment is made in entrepreneurial firms,” the company said in a recent report.

It ain’t pretty, but it works

China’s method of funding has built the world’s largest electric vehicle and solar energy markets.

For just over two decades, large portions of the government’s cleantech funds were directed at the clean energy sector, driving down the price of solar panels globally and making China a world leader in panel production. Now, photovoltaic cells are seen more as a commodity than a technology.

The government made similar moves with electric vehicles, a cornerstone of the country’s low-carbon economy. China was late in producing gas-driven cars, putting it behind the US, Japan, and Germany. In 2009, China introduced subsidies for EVs in the hope that these vehicles could take the lead in the next generation of cars. 

After spending RMB 60 billion in subsidies over ten years, China now has the largest EV market out of any country in the world. 

But this method of investment comes at a cost: It can be inefficient and wasteful. 

In the renewables sector, the state hasn’t always been able to keep up with the rate at which the market has expanded. The government has a backlog of missed subsidy payments. The deficit is huge—reaching RMB 328 billion at the end of 2020, according to Credit Suisse.

The problem stems from China’s tendency to promote and then regulate. The state relaxes regulation to encourage innovation, the market booms, and the officials impose regulation and pull back on support. 

As a result of subsidies, China’s renewable energy capacity eclipses actual demand for the power that these sources produce. The government is now encouraging these firms to fend for themselves, as the cost of renewable energy reaches parity with fossil fuels in some areas in China. 

In China’s EV sector, preferential treatment resulted in overinvestment and ill-spent funding. Government support for the sector triggered a rush into the industry. Investors threw money at entrepreneurs with little to no experience in the auto sector. They  lost billions of yuan after the bubble burst. 

At the height of the bubble, there were nearly 500 EV companies in China. Now, just a few survive, including Nio, Li Auto, Xpeng.

Rise of the cleantech VC

In September, China’s President Xi Jinping laid out plans to reach peak carbon emissions by 2030 and carbon neutrality by 2060. 

The speech served as a call to arms, and venture capital firms and corporate VCs have already set up several multi-billion dollar cleantech-focused funds, pointing to the start of a possible rush into the sector.

• In March, cleantech company Envision Group and venture capital firm Sequoia Capital China set up a carbon neutrality tech fund worth RMB 10 billion. “The fund will cooperate with enterprises and governments to create a carbon-neutral technology innovation ecosystem,” the companies said in a statement. 
• Also in March, GCL Energy Technology and CICC Capital, an arm of  China Capital Investment Group, launched a RMB 10 billion fund. The fund will focus on decarbonizing the auto sector and will raise around RMB 4 billion in its first phase, China Daily reported on March 31. 

These amounts are small compared to the government’s promised RMB 88.5 billion green fund, but represent a significant push from the private sector to heed to government’s calls to invest in the sector. 

Zhang Lei’s Hillhouse Capital is also pushing into the cleantech industry. Earlier, this month, the company  led a RMB 50 million funding round for carbon emissions management firm Carbonstop, in what could be the beginning of a new wave of founding rounds for cleantech startups in China. 

Hillhouse has a significant number of cleantech companies in its portfolio. These firms include Longji Solar, solar power station operator Xinyi Energy, and battery maker CATL. 

Another venture investor is Tsing Capital. The firm has backed a slew of startups that have become household names in cleantech, including drone maker eHang, China Hydro, and US-based Lucid Motors.

These government and private funds represent just a drop in the ocean when compared to what China is going to need to spend to meaningfully reduce its emissions. But given the amount of attention cleantech in China has received in the past few months, it’s likely just the beginning. 

Carbon emissions management startup Carbonstop has raised RMB 50 million ($7.77 million) in Series A funding, the company announced this week.

Why it matters: Carbonstop could be on the leading edge of a funding trend as Beijing pushes to go green.

• In September, Chinese President Xi Jinping stepped up efforts to reduce China’s pollution by announcing plans to reach peak emissions by 2030 and carbon neutrality by 2060.
• Goldman Sacks estimates that investments in reducing emissions could reach $16 trillion in the next 40 years.

READ MORE: Seven Chinese cleantech companies you should know about

Details: Carbonstop’s RMB 50 million Series A was led by Hillhouse Capital and Matrix Partners China.

• The company provides a software-as-a-service solution to manage carbon emissions, allowing its customers to analyze and evaluate their emissions data. 
• Founded in 2011, the Beijing-based company has provided its carbon accounting services to some of China’s biggest tech companies, including JD.com, Baidu, and Ant Group, as well as government agencies like the National Development and Reform Commission.

“Enterprise-side carbon neutrality, which got little attention 10 years ago, is becoming a requirement. I believe consumption-side carbon neutrality will follow this trend in the next 10 years.”

Yan Luhui, founder of Carbonstop, in a statement May 10

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, James and Elliott are joined by Stewart Randall, Director of Operations at Intralink Shanghai and a regular TechNode contributor. Stew talks about the current semiconductor frenzy in China, what are the factors fueling it, and how investors can differentiate the contenders from the pretenders.

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

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

Guest:                   

• Stewart Randall – @stewrandall

Editor:

• Peter Isachenko

Podcast information:

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

Editor’s note: The ‘Techlash Tracker’ stopped updating from November as tech crackdowns became recurring in China. The topic is now part of TechNode’s daily news coverage. 

Starting this week, TechNode is launching a new open resource. The “Techlash Tracker” is a database of major regulatory moves involving big tech in China, an open-source project to help make sense of a major trend defining China tech this year. 

The tracker is a regularly and openly available updated set of spreadsheets, built in Airtable, recording events. Click here to view. 

We invite anyone interested in China tech to use this resource for analysis, and to contribute to it.

Something is happening here, but we don’t know what it is

In China tech, the word of the year is “antitrust.” Alibaba was fined a record-breaking $2.8 billion for “forced exclusivity” and other anti-competitive practices, while Meituan faces a probe by market regulators over the same practices. Tencent, Didi, and Baidu—to name only a few—have been fined lesser amounts for failing to submit M&A deals for review.

Or is it “de-risking”? The IPO of fintech pioneer Ant Group, slated to be the world’s largest, was abruptly axed late last year as regulators prepared a series of changes to its operations. JD Digits, a competitor, withdrew its IPO application voluntarily in the wake of the fiasco. This week, 11 other tech majors were summoned to Beijing to discuss changes to their fintech operations.

Some say it’s all about data. Beijing has moved in the past year to recognize the strategic importance of this resource, which it has called ”the new oil,” and hopes to prevent tech companies using walled gardens to monopolize access to it.

Related to data, the list continues: consumer rights, privacy, cybersecurity.

We can see the trend: Big tech is being regulated as never before. At TechNode, we’re seeing a big trend, and we’ve been wondering how to understand it—and what to call it.

It’s tempting to see it as the local vector of a so-called global “techlash” that embraces everything from the EU’s General Data Protection Regulation (GDPR) to US Senator Elizabeth Warren.

Or maybe it’s just “Jacklash”: both Alibaba and Ant were founded by Jack Ma, a flamboyant billionaire who annoyed regulators when he dismissed banking authorities as “old men” in a speech last year, and some commentators have interpreted many recent moves as personal attacks on him. But then, how to explain the broadening scope of the investigations?

Just make a list

When we don’t know where to start with a topic, we often approach it by just making a list. In our new “Techlash Tracker,” we aim to make a database of key events in big tech regulation. We plan to include enforcement actions, fines, and announcements of new laws and regulations. We will track private antitrust lawsuits in another sheet.

We’ve chosen an intentionally vague name, “techlash,” rather than “antitrust” or “crackdown,” to indicate uncertainty about an interpretation. 

The tracker is intended as a living document: we aim to update the list at least once a week with new events, if applicable. We’ll also continue to dig through our archives to add more previous events, and plan to create some visualizations to help understand the material as the list grows.

The material here is also a bit raw. Expect to see it in more digestible forms in our reporting in the coming months as well as, we hope, in the work of our friends and colleagues.

An open resource

The Techlash Tracker is an open resource. In addition to making it free to use, we invite other analysts to use the data we’ve collected (but please do credit us if so). We’re also counting on our readers to help us catch events. Click here to submit more events for the tracker if you see something we’ve missed.

Thanks for your support, and we hope you’ll find the tracker useful!

Your techno-friends,

The TechNode team

Hello Inc., the bike rental startup behind China’s ubiquitous blue HelloBikes, has submitted a prospectus to the US Securities and Exchange Commission in preparation for a Nasdaq IPO. This is a rare look into the economics of the bike-sharing industry, as it’s the first time a company in the sector has released extensive financial data.

Why it matters: Hello’s filing is a sign that the once-volatile bike rental industry is moving beyond its growth phase.

• Hello and its competitors Qingju (an offshoot of Didi) and Meituan Bike survived the initial price wars and are shifting priorities from investment to profit.

READ MORE: The bike rental boom is dead. Long live bike rental

Details: The numbers in the filing reveal that Hello still has a ways to go to reach maturity.

• The company has yet to turn a yearly profit. Nevertheless, its figures have been steadily improving, rising from a net loss of RMB 2.2 billion ($340 million) in 2018 to RMB 170 million in 2020.
• The company’s revenue grew 25% to reach RMB 6 billion in 2020.
• Hello hopes to raise $100 million in its Nasdaq debut.
• The company has diversified beyond bike rental. Hello has added electric bikes to capture more of the market, and its ride-hailing platform has proven to be a strong competitor to market leader Didi

On track for profits? Industry experts weigh in.

• “For me, the main surprises [from the company’s filing] were around HelloBike’s market share. On the basis of its figures, alongside research it commissioned, HelloBike is the world’s largest bike rental provider, China’s second-largest carpool platform, and the country’s third-largest local services platform,” Michael Norris, research and strategy manager at AgencyChina, told TechNode. 
• Doug Young of the market research agency The Bamboo Works was less optimistic: “The company’s net loss attributable to ordinary shareholders ballooned by 50% last year to RMB 4.5 billion ($700 million) … Also, somewhat worrisome were figures for the company’s shared bike and electric scooter transaction volume, which is its core business and accounts for 91% of revenue. The prospectus showed revenue from that part of the service actually fell in every quarter of last year from the same quarter a year earlier, including a 6% drop in the fourth quarter.”
• The company warns that it is not immune to Beijing’s recent crackdown on tech firms. Among the risks the company mentioned in its filing is the possibility of anti-monopoly claims. Hello’s main competitors Didi and Meituan have both been subject to fines from regulators in the last two months.

“HelloBike was a latecomer to the bike-sharing money wars. Its come-from-behind two-wheel leadership, as well as its growing carpool share, suggest the company is the beneficiary of savvy strategists and operators.”

—Michael Norris

Context: At its peak, 80 companies around China operated in the bike rental industry. But the sector soon became bloated and dozens of these firms went under.

• The three remaining dominant bike rental players have survived in part because of deep-pocketed backers: Meituan Bike was formerly Mobike before being absorbed into lifestyle services giant Meituan, Hellobike’s largest shareholder is Alibaba’s Ant Group, and Qingju is of course under Didi.
• Their success is also due to evolving market strategies, raising prices and expanding offerings to develop sustainable businesses.
• Energy Monster, the leader in China’s power bank rental market, is another sharing economy representative that has recently IPO’d on Nasdaq.

Cleantech is a big field. Mention it to someone and it’s likely to elicit images of fields of solar panels or forests of wind turbines. 

But it’s a lot more than that. It encompasses technologies that reduce our negative impact on the environment by improving energy efficiency and using resources in a more sustainable way.

We’ve found a lot of activity in this area. Lots of startups are doing their part to mitigate the effects of pollution on the environment—and cashing in on the broad drive to reduce emissions. 

What we’ve come up with is an interesting mix of firms, from those that provide software to others that produce the backbone of clean energy production.

Sunman Energy

Area: Solar panels
Funding: Early stage
Location: Shanghai

Founded by solar energy pioneer Shi Zhengrong, Sunman produces lightweight, flexible solar panels that the company says are “70% lighter and up to 95% thinner” than traditional solar panels. 

• Sunman’s key innovation is removing glass from its solar cells. Typical solar panels use glass to transmit sunlight into each module. Instead, Sunman’s panels are made of a lightweight polymer material. 
• The new panels could cut emissions resulting from glass production, which requires large amounts of non-renewable energy.
• A glass shortage in the wake of the COVID-19 pandemic also dampened the prospects of the solar industry. The price of the glass that covers photovoltaic panels rose more than 70% last year, according to Daiwa Capital Markets. 
• No glass means that Sunman’s panels are lightweight. They can be used where traditional panels cannot, including on top of vehicles and on roofs that don’t support heavier panels. The panels can also be incorporated into building materials.
• Among the initial overseas installations, the company panels now supply electricity to an apartment building in Melbourne, Australia, and power a train in southeastern Australia’s Byron Bay.

Shi, Sunman’s founder, also started Suntech Power, one of the world’s largest producers of solar panels. He left the solar giant after the company faced financial trouble and he was bought out in 2013. Shi then went on to found Sunman in 2015. 

In November last year, the company received $7 million in funding from the Australian government-owned Clean Energy Finance Corporation as part of its $12 million Series B. SoftBank China, Southern Cross Venture Partners, and Shi also participated in the round.

READ MORE: China’s big tech vows big carbon cuts with little detail

Carbonstop

Area: Carbon accounting software
Funding: Early stage
Location: Beijing

Carbonstop provides software that helps enterprises cut emissions. The cleantech company’s main product functions as an accounting platform for carbon emissions, allowing customers to analyze and evaluate their emissions data. 

• China’s national carbon trading system could drive demand for Carbonstop’s software, which in the future could allow companies to buy and sell emissions credits. 
• The national carbon trading system is still in its infancy. Currently only energy companies are required to enroll.
• Carbonstop is already providing its services to some of China’s biggest tech companies, including JD.com, Baidu, and Ant Financial. It also provides services to government agencies like state planner National Development and Reform Commission. 

Yan Luhui, also a member of the UK-based non-profit Carbon Disclosure Project, founded Carbonstop in 2011. He previously worked at environmental consultancy Best Foot Forward. 

BYD

Area: EV batteries
Funding: Publicly traded
Location: Shenzhen

Founded in 1995 and listed in Shenzhen, BYD is one of China’s biggest electric vehicle (EV) makers. As a result of the COVID-19-induced downturn, the Warren Buffet-backed company saw its deliveries drop to 179,000 vehicles in 2020, down 18% compared to 2019. 

• BYD is one of the world’s biggest battery makers, but its batteries have primarily been used in its own cars. The company plans to start selling these batteries to other EV makers later this year, Nikkei Asia reported. 
• BYD is also the world’s biggest manufacturer of electric buses, which are being rolled out in bus fleets around the world. 
• Battery technology is crucial to getting EVs on China’s roads. The country’s EV ambitions have built some of the world’s biggest battery manufacturers, including BYD and CATL. 

CATL

Area: EV batteries
Funding: Publicly traded
Location: Ningde, Fujian 

CATL controls more than a third of the global EV battery market. The company produced 4.3 gigawatt hours of batteries last year, up 166% year on year, according to SNE Research. 

• The Shenzhen-listed company’s batteries are used by a growing number of auto manufacturers including Volkswagen, Tesla, Volvo, BMW, and Daimler. 

Over the past 10 years, China has built the world’s largest EV market. And the market is projected to rapidly expand. Chinese consumers are expected to buy 1.9 million of these vehicles this year, up nearly 50% from the 1.3 million sold last year, according to figures from market research firm Canalys. 

Clobotics

Area: Wind turbine inspections
Funding: Early stage
Location: Shanghai

Clobotics is looking to take advantage of China’s massive renewable energy boom by automating wind turbine inspections, which take up to six hours when inspected manually. The sector is an area of growing interest for startups around the country. 

• Clobotics claims to be able to complete inspections of wind turbines in 25 minutes, with the help of autonomous drones and its computer vision platform.
• Clobotics has partnered with such companies as Shanghai Electric, LM Wind Power, Concord New Energy, and GEV Wind Power.
• After an inspection is completed, images are uploaded to the cloud where the company’s analytics platform examines the imagery and identifies issues with the blades.
• Clobotics’ investors include GGV Capital, CMC Capital, and the overseas-focused investment arm of Taiwan-based China Development Financial,  CDIB Capital. 

China’s wind power industry has expanded dramatically. The country installed more than 70 gigawatts of capacity in 2020 alone, nearly double its previous record. Just 1 gigawatt is the equivalent of more than 400 wind turbines, according to estimates from the US’ Office of Energy Efficiency and Renewable Energy. 

EQuota Energy

Area: Smart grid management software
Funding: Early stage
Location: Shanghai

EQuota Energy’s platform collects data and uses it for preventive maintenance and to optimize building energy usage.

• Microsoft Accelerator Beijing accepted EQuota as part of its 12th class in 2018.
• The company is a small fish in a very big pond. It is a rare grid technology startup in a field dominated by state-owned companies.
• Its product is installed in Shanghai’s K11 mall, the city’s ninth-tallest building. 

As cleantech becomes the norm and machines in the energy generation process are increasingly connected to the cloud, companies like EQuota Energy will benefit. EQuota’s smart energy management platform creates efficiency gains along the energy distribution process using artificial intelligence.

Alpheus

Area: Waste management robots
Funding: Early stage
Location: Kunshan, Jiangsu

Alpheus is an AIoT (artificial intelligence + Internet of Things) startup with a range of waste collection appliances that have been deployed in multiple Chinese cities. The cleantech company provides AI-powered trash cans that can automatically sort waste for recycling. 

• Waste-sorting programs in China’s major cities have been a topic of contention. Companies like Alpheus claim that they can reduce waste by up to 40%, but adoption has been spotty. In some cases people have resorted to sorting manually, even though waste sorting bins are available.
• Alpheus envisions an entire waste management supply chain, including trash cans, trash-sorting robots, and waste collection trucks. 
• The company’s trash cans were adopted in Shanghai shortly after the city’s compulsory trash sorting regulations came into force in July 2019. 

Recycling trash has been well-handled by informal collectors, who pick up and sort waste manually. But other forms of waste have been a pain for municipal authorities. That said, machines haven’t been able to match humans in terms of waste-sorting efficiency.

As the government prioritizes cutting solid waste, solutions set to replace analog counterparts include smart public toilets, smart trash cans, and trash-sorting robots. 

Tune in next month

 Funding will be key to the success of these startups. They stand to benefit immensely from the cleantech boom—a market that is expected to reach $16 trillion in the next 40 years. So where is this funding coming from? That’s what we’ll explore next time. 

A little over a decade ago, China’s leaders laid out plans to become the world’s biggest market for electric vehicles (EVs). The country was late in producing gas-driven cars, putting it behind the US, Japan, and Germany. In 2009, China introduced subsidies for EVs in the hope that these vehicles could take the lead in the next generation of cars. Now, observers ask if hydrogen is next.

China’s EV push worked—the country is now the world’s largest market for EVs and is home to some of the world’s largest manufacturers of EVs and EV batteries.

Now, the government and some of China’s biggest energy companies are jumping into hydrogen energy. More than 10 state-owned energy companies including Sinopec and State Grid have plans to increase the use of hydrogen energy in the country.

While China has a well-developed EV industry, the country is looking for new ways to cut emissions. The government doesn’t want to “put all its eggs in one basket with battery EVs,” Tu Le, managing director of Beijing-based consultancy Sino Auto Insights, told TechNode. 

In September, Chinese President Xi Jinjing revealed plans for China to reach peak emissions by 2030 and hit carbon neutrality by 2060. Hydrogen fuel, which can be used in applications from industrial processes to transportation, could form a linchpin in reaching this goal. The technology could allow China to move away from fossil fuels as the cost of producing clean hydrogen drops. 

“Hydrogen is now expected to play a much more important role to drastically decrease [China]’s greenhouse gas emissions over time,” Tu Jianjun, adjunct professor at the School of Environment at Beijing Normal University, wrote in a paper late last year. 

Bottom line: China’s hydrogen energy sector could see massive growth in the next 30 years. The country’s commercial vehicle sector is likely to see the biggest benefit from the technology. 

• The country already produces 20 million tons of hydrogen annually, around a third of the world’s total, according to a report by the Beijing-based think tank Green Belt and Road Initiative Center. 
• Little of that goes towards energy use, and, despite the promise of the zero-emission technology, it’s going to be a long road to mass adoption. Currently, the majority of China’s hydrogen comes from fossil fuels, which contributes to the country’s carbon emissions. 

What is hydrogen power? Hydrogen fuels cells are a dense, efficient, and clean form of energy storage. Use power to isolate the gas, and then you can deploy it to power a car in a reaction that’s cleaner than fossil fuels and requires less heavy equipment than battery electrics. It even has applications in energy-intensive industries like the steel sector. One of the most popular prospects at the moment is fuel cell electric vehicles (FCEV).

• These vehicles use hydrogen as fuel. Unlike battery-powered electric cars, they don’t rely on electricity from the grid. Instead, these cars combine hydrogen and oxygen to produce electricity. 
• Energy released from the gas is clean. So clean, in fact, that while petrol-driven cars release a myriad of dangerous greenhouse gases, the byproduct of hydrogen power is water. 
• Hydrogen is also well-suited to high-temperature industrial processes, and the technology could significantly reduce the sector’s carbon footprint, particularly if the hydrogen is produced using renewable energy. 

The element is rarely found in its pure form and needs to be extracted from water, coal, or natural gas. But producing it in an environmentally friendly way is currently expensive, preventing wider use until the issue is dealt with. 

China eyes hydrogen: After being delayed last year, a national plan for hydrogen is expected at some point in 2021. Already, several whitepapers and planning documents have laid out goals to decrease emissions and increase hydrogen energy adoption. Until recently, China’s interest in developing its hydrogen economy was not driven by an ambition to cut emissions. 

• The country should increase the number of fuel cell electric vehicles (FCEV) on its roads from 5,000 in 2020 to 1 million in 2030, the China Automotive Technology and Research Center (CATARC), a research institute overseen by the State Council, said in 2017. 
• The country should increase its hydrogen refueling infrastructure from 100 stations in 2020 to 1,000 in 2030, the CATARC said.
• The technology should make up 10% of China’s total energy mix by 2050, up from 2.7% in 2019, China Hydrogen Alliance, which is supervised by the National Energy Administration (NEA) and the National Development and Reform Commision (NDRC), said in its 2019 whitepaper. 
• At the same time, revenue from China’s hydrogen economy should reach $1.7 trillion by 2050, up from $42.5 billion in 2019, the group said. 
• The 13th five-year plan for energy issued by the NDRC and the NEA in 2016 promotes hydrogen production pilots and R&D into fuel cells. 

Localized developments: Despite the lack of a national plan, Beijing has encouraged local governments to develop and fund their own hydrogen industries. But these plans are often far more optimistic in their targets than industry expectations, Yuki Yu, founder of Energy Iceberg, wrote in a report. 

• Yu added up figures from just seven of the around 50 regional governments that released hydrogen plans by late 2019. In total, they planned on a total of 15,000 FCEVs by 2020, much higher than CATARC’s 5,000. 
• Recently, the southern province of Guangdong announced (in Chinese) several hydrogen energy and fuel cell projects worth a combined RMB 60 billion. 

“Anytime the Chinese government puts the thumb on the scale, there’s going to be 200 or 300 companies globally that come with their hand out.” 

Tu Le, managing director of Sino Auto Insights

Better than batteries? But China has bet big on competing technology. The country spent billions building its electric vehicle industry. Government subsidies led to the rise of some of the biggest EV companies in the world, and made China the world’s number one market for these types of vehicles. 

• Batteries present significant problems when they reach the end of their lifespan. Recycling facilities will need to see higher rollout to deal with this issue.
• Compared with batteries that are currently used in EVs, hydrogen fuel cells are energy dense. 
• Depending on the grading of a charging pile, EVs can take a long time to refuel.
• Fuel cell vehicles don’t share this problem. They refuel much like their gas-driven counterparts, a process that typically takes a few minutes. 

A brief timeline: China’s drive to use hydrogen for power has been years in the making. The country’s ambitions were initially set out as part of its Made in China 2025 plan. There has been a lot of action in the industry over the past few years, and things appear to be picking up pace. 

• May 2015: China’s Premier Li Keqiang outlines the county’s Made in China 2025 plan, which includes mentions of fuel cell vehicles. 
• June 2017: China’s transport and science ministries releases plans to promote research and development into fuel cell technologies and hydrogen infrastructure.
• June 2019: Wan Gang, a former science and technology minister—the same man who two decades ago convinced Beijing to pursue its EV industry—says the country needs to “look into establishing a hydrogen society.”
• June 2019: During the same month, the China Hydrogen Alliance releases a landmark white paper on the country’s hydrogen industry. The document is widely regarded as a key document that explains the government’s goals in developing its hydrogen power and fuel cell industries.
• April 2020: China releases a new draft Energy Law, classifying the gas as an energy source rather than a hazardous chemical. This classification previously limited its applications in energy.
• September 2020: SAIC, China’s largest automaker, announces plans to release 10 fuel cell vehicles by 2025, with production capacity hitting 10,000 vehicles in the same year. 
• March 2021: At this years’ Two Sessions, Ma Yongshen, president of China’s largest oil company Sinopec, calls for the country to focus on producing environmentally friendly hydrogen. Ma’s views were echoed by Li Chan, an academician at the Chinese Academy of Sciences. 
• March 2021: Following Ma’s speech, Sinopec says in an earnings call on March 29 that it would step up investment in the technology by building 1,000 hydrogen refueling stations that also sell conventional fuels by 2025, without specifying how much it would invest. 
• April 2021: Nearly 20 clusters of Chinese cities submit applications for a central government scheme to finance building hydrogen infrastructure and demonstration areas in the hopes of making fuel cells commercially viable. 
• April 2021: The Beijing government releases draft plans to deploy 10,000 fuel cell vehicles on its roads and build 74 refuelling stations by 2025.

What’s the potential? In China, buses and trucks will likely come first. The policy environment currently favors using fuel cells in heavier, commercial vehicles rather than passenger cars, Energy Iceberg’s Yu said.

• Experts TechNode spoke to didn’t doubt the potential of the technology, but expressed concerns over mass adoption. 
• “Right now, EVs are at least ten years ahead of fuel cell vehicles. There is a lot of existing infrastructure, so right now it will be really hard for fuel cells to compete,” Yu said. 
• Hydrogen is better suited than battery power for vehicles that have high utilization rates, like buses and trucks. “It doesn’t make sense to have a fleet of buses that are just parked because they are being charged,” Tu Le, managing director of Beijing-based consultancy Sino Auto Insights, told TechNode. 

Dirty secrets: Hydrogen is only as clean as the process used to produce it. The element is rarely found in its pure form, and typically needs to be extracted from fossil fuels or water. Depending on how it is produced, it can be completely clean or release harmful gases. 

• The majority of hydrogen in China is manufactured using natural gas or coal, known as “grey hydrogen.”
• Grey hydrogen is primarily produced in coal or oil-based plants in refineries., representing a major hurdle that faces the industry.

Cleanup in aisle H: The industry needs a cleanup to achieve its green potential.

• The cleanest, known as “green hydrogen” comes from separating water into hydrogen and oxygen using electricity generated from renewable sources. This form of production is seen as vital to dramatically reducing carbon emissions but is expensive given how much renewable energy is needed. 
• Meanwhile, “blue hydrogen” is produced in the same way as grey hydrogen, but around 50% of the carbon produced is captured and stored underground. 
• According to the Hydrogen Council, the price of green hydrogen is expected to halve in the next ten years. 

“More than 80% of hydrogen produced in China is grey. But we see a growing number of green hydrogen projects being launched. In 2018, there were probably just one or two projects, but last year, at least 30 were announced.” 

Yuki Yu, founder of Energy Iceberg

What next? China has a history of rapidly developing domestic industries after choosing them key development priorities. The country’s EV and solar industries are a testament of this. Hydrogen energy is likely to be next. Development—and funding—will likely accelerate once a national plan is rolled out. 

• Beijing has already launched a subsidy system, in which it encourages cities to form alliances to develop hydrogen supply chains. 
• The subsidies are similar to the approach China took when developing its EV industry, and the developments that result will likely spillover into the global hydrogen economy. 

READ MORE: Little mention of China’s EV industry in Five-Year Plan bodes well: experts

Big opportunities: Hydrogen has big potential, but it will take big investments to bring the technology to widespread use. Oliver Bishop, general manager of hydrogen at petroleum giant Shell, told Green Tech Media that China is expected to play an important role in the global hydrogen economy, with large scale deployments meaning cheaper costs around the world. 

China’s leadership in the hydrogen economy hinges on whether it can clean up its hydrogen production processes—and convince the world that electric vehicles are not the only way. 

“There needs to be private enterprise appetite to diversify out of battery electrics, which are already doing research into batteries and infrastructure,” Tu said. 

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, James and Elliott are joined by Protocol’s Zeyi Yang. Zeyi shares his thoughts on Zhihu, the popular Chinese information-sharing platform that recently IPOed in New York. The guys discuss the company’s strengths and weaknesses, and how investors view the company’s potential.

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

Hosts:

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

Guest:                   

• Zeyi Yang – @zeyiyang

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, James and Elliott are joined by frequent CTI guest Michael Norris to cover the 2020 Q4 earnings of Pinduoduo, Kuaishou, and Meituan. The guys also answer some questions posed by listeners of the show on Twitter.

Sorry folks, we had a little trouble with our recording setup and there’s some interference in the audio.

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping
• Kuaishou

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

Revenue growth for Chinese telecommunications equipment maker Huawei fell dramatically in 2020 as overseas sales shrank in the wake of US sanctions and disruptions caused by the Covid-19 pandemic, the company reported on Wednesday.

Why it matters: The decline comes as Huawei’s revenues shrank in all markets but China. Huawei was placed on a US trade blacklist in 2019, blocking the company from sourcing US-made components without permission.

• Huawei has faced pushback across international markets as countries around the world place restrictions on rolling out the company’s telecommunications equipment.
• Huawei’s smartphone sales have fallen drastically since the ban. In the fourth quarter of 2020, Huawei shipped just 33 million handsets globally, down 41% year on year, data from Counterpoint Research showed.

Details: Huawei’s revenue reached RMB 891.4 billion in 2020, up 3.8% year on year, but down from an annual growth rate of 19.1% in 2019.

• The company saw revenue growth from its consumer business—which includes smartphones, tablets, and computers—fall off a cliff. Growth in this segment fell from 34% in 2019 to 3.3% last year.
• “The US restrictions have impacted our business, especially our mobile phone business, and that resulted in modest growth last year,” Ken Hu, Huawei’s rotating chairman, said during a press conference on Wednesday.
• Sales from the company’s enterprise business were a bright spot, increasing 23% year on year to reach RMB 100 billion. Revenue from its carrier business increased just 0.2% annually to RMB 300 billion, slowing from 3.8% in 2019.
• The company’s net profit hit RMB 64.6 billion, up 3.2% on the year but slower than the 5.8% in 2019.
• China accounted for much larger portion of the company’s overall sales. The country made up nearly two-thirds of its revenue last year. In 2019, sales from China accounted for just under 60% of its revenue.

This article has been corrected to reflect that Huawei’s consumer business revenue growth fell, not its revenue as previously stated. 

As China’s government lays out goals to hit carbon neutrality by 2060, Chinese tech companies are pledging to follow Beijing’s lead by drastically reducing their own emissions. 

In the leadup to and aftermath of the annual meeting of China’s national legislature in early March, China’s biggest companies have been making big promises. Alibaba-affiliate Ant Group has vowed to hit carbon net zero by 2030. JD Logistics has pledged to go completely renewable by the same year. Tencent has announced that it has a plan for eventual carbon neutrality, without a timeline. None have laid out exactly how they’ll reach their goals. 

Wind and solar energy sources have reached parity with coal in parts of the country, but China’s companies have so far been slow to increase the share of electricity they get from renewable sources. Tech firms’ growth in carbon emission is eclipsing their growth of renewable energy use. 

Similarly, social media and gaming firm Tencent’s carbon emissions from its offices and data centers increased to 857 million tons in 2019, up 20% on the year, according to the company’s 2019 annual report. It did not disclose what percentage of electricity it sources from renewables. 

Previous top-down initiatives, including the government’s poverty alleviation initiative, have led to new opportunities for the country’s tech firms. Opportunities mean money, but cutting emissions means scaling back or potentially costly new investments.

The carbon pledges

Since September, when Chinese President Xi Jinping announced that China would reach carbon neutrality by 2060, several companies have laid out plans to control their emissions. These press releases typically lack detail on how the companies will reach their carbon goals. 

Net zero doesn’t mean that companies won’t produce carbon but they’ll offset their emissions by investing in carbon capture technologies or by planting trees, among others. 

JD

In a November press release, e-commerce giant JD said its delivery arm JD Logistics would reduce its carbon emissions by half of its 2019 levels in 2030, and only use renewable energy sources from the same year. JD Logistics is one of six branches of JD’s empire, and has filed for a Hong Kong IPO. The unit is the largest polluter of all JD companies, according to a company spokesperson.. 

JD.com, the JD brand’s flagship e-commerce platform, has yet to outline a plan to cut emissions. 

We’ve heard nothing about how e-commerce marketplaces plan to tackle carbon neutrality. That’s likely because the task is particularly difficult for these companies. They’d have to decide whether to make emissions standards for the millions of merchants who use their platforms. 

Tencent

On Jan. 12, Tencent, the company behind popular messaging app WeChat, unveiled its own plan to reach net zero emissions in a 2,500 character WeChat post. The document, which focused primarily on reducing emissions from its buildings and data centers, detailed methods it could use to do this, including reusing heat generated by its data centers and using novel liquid technology to lighten its electricity usage. The company placed heavy emphasis on using AI to cut emissions, but did not set a timeline to reach carbon net zero. 

“In the future, I expect the biggest part will be powering data centers with clean energy. It will be difficult, but we will work hard at it,” Pony Ma, CEO of Tencent, said in a WeChat post commenting on Tencent’s plan and shared by Chinese media. 

Alibaba and Ant

Alibaba-affiliate Ant Group, the world’s largest fintech company, has been the most explicit and ambitious. It plans to hit carbon net zero by 2030, according to a press release dated March 12. The company said it had created a roadmap to eliminate emissions from its electricity usage this year, and that it would completely cut emissions from its supply chain, which includes data centers and infrastructure, by 2030.

Alibaba also hasn’t released a plan aimed at cutting emissions, but ranked highest in a recent Greenpeace study focused on renewable energy use among Chinese tech companies.

Baidu

Baidu detailed its work on lowering its carbon emissions in its report on low carbon development, which came as a response to Beijing’s latest carbon goals. It also laid out the ways it is greening its data centers, but has not made public any emissions targets. At this year’s Two Sessions in Beijing, CEO Robin Li made a number of proposals for cutting emissions in transportation, including policies to promote rolling out autonomous vehicles, and increasing the efficiency of transportation systems using AI, big data, and 5G.

Big data, big challenges

Key to these plans will be how companies deal with data centers. Explosive energy use from these facilities are not a uniquely Chinese problem. Tech giants from the US have also been working on making their storage and computing facilities more efficient and eco-friendly. 

For tech companies, data is money, and the billions of WeChat messages, emails, photos, and videos uploaded by internet users everyday need to be stored somewhere. But more storage means more pollution. 

In 2018, data centers in China used 161 terawatt-hours (TWh) of electricity, according to 2019 research by Greenpeace and the North China Electric Power University. That’s enough to power a mid-sized nation, and is four times higher than New Zealand’s total energy consumption in 2018. 

During the same year, around 73% of all the electricity data centers in China used was generated by coal and bought from the grid, according to Greenpeace’s report. 

Total energy demand from data centers is expected to reach 267 TWh by 2023, around 4% of China’s total energy consumption in 2019. Should China’s energy mix not change, its tech industry will be responsible for generating 163 million tons of carbon dioxide, more than that generated by the entire population of Venezuela. 

Data centers in China have seen some improvements, with the efficiency of tech companies’ data centers rivalling their international counterparts. “While China’s data center industry has made significant improvements in terms of energy efficiency, the industry’s massive carbon footprint is proof that much more action is needed to increase reliance on clean energy sources,” said Greenpeace East Asia climate and energy campaigner Ye Ruiqi. 

As these companies push for growth, they’ll undoubtedly need more data centers to process and store information from their users. Last year, Alibaba said it would invest $28 billion in data centers over the following three years. Similarly, Tencent announced plans to pile $70 billion into new infrastructure, which includes data centers, cloud computing, and artificial intelligence. 

Increasingly, Chinese companies like Alibaba and Tencent have begun locating new data centres in areas that are rich in renewable energy, including northern China’s Hebei and Inner Mongolia, as well as Guizhou and Sichuan provinces in the country’s southwest. 

Nevertheless, officials in some provinces are becoming increasingly cautious of power-hungry data centers. Beijing, Shanghai, and Guizhou have mandated that new data centers meet efficiency benchmarks. Meanwhile, Inner Mongolia last month proposed controlling the growth of new data centers in the region after it was censured by Beijing for failing to meet energy consumption control targets. 

Mountains of trash

Aside from energy usage, some of China’s biggest e-commerce firms are responsible for producing mountains of waste. As firms like Alibaba, JD.com, and Pinduoduo see record-breaking sales figures, their plastic waste footprint increases. 

During last year’s Singles Day shopping festival, which ran from Nov. 1 to 11, China’s postal and express services delivered nearly 4 billion packages, according to the country’s postal regulator. There are no official figures on how much waste was produced during this time, but one estimate shows the 1.88 billion parcels delivered during the 2019 festival period produced 250,000 tons of garbage.  Around 20% of that total can’t be reused, though far more goes unrecycled because of the costs.

E-commerce platforms have attempted to deal with the issue. Last year, Alibaba’s logistics arm Cainiao said it had introduced biodegradable packing and cut down on tape usage. It also said it cut down on paper used for shipping labels. 

Long way to go

While China’s tech companies have shown increased interest in reducing their carbon emissions, there is still a long way to go. 

In a separate report from Greenpeace and North China Electric Power University at the beginning of 2020, researchers said China’s tech companies need to “dramatically scale up their procurement of clean energy.”

“Internet companies and data center operators should set targets for 100% renewable energy use,” the researchers wrote. 

To do this, companies can build or invest in renewable energy, an option used by data centers around the country by installing solar panels in their roofs. Additionally, companies can purchase renewable energy for provincial generators or buy green power certificates. 

“Buying green power certificates allows companies to claim environmental benefits associated with renewable energy generation, even if electricity from a renewable power plant does not feed directly into a data center facility,” Greenpeace said.

But the Chinese government is taking renewables more seriously, and that could spur tech companies to action. These companies often respond to policy priorities—for example, tech giants including Alibaba, Pinduoduo, and JD took Beijing’s drive to alleviate poverty seriously by narrowing in on China’s rural communities. Developing new markets in China’s hinterland was lucrative for the country’s tech firms, powering much growth seen in the past few years.

Could greening tech play out the same way? It’s not clear. The plans we’ve seen so far are promises to cut back, or install costly new systems, not develop new markets. Lasting change may rely more on companies who figure out how to get rich by going clean—and that’s the topic we’ll look at next month.

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.

Recorded live on Clubhouse, Elliott chats with University of Hong Kong professor Angela Zhang about her new book “Chinese Antitrust Exceptionalism.” They explore the unique structural and cultural frameworks that distinguish China’s antitrust approach from that of other prominent nations, how China may use antitrust in its competition with the US, and what investors can learn from Ant Group’s halted IPO. 

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping

Hosts:

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

Guest:                   

• Angela Huyue Zhang – @AngelaZhangHK

Editor:

• Peter Isachenko

Podcast information:

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

Chinese regulators have given more than 130 apps including those developed by dronemaker DJI, social media and gaming giant Tencent, and artificial intelligence firm iFlyTek until Wednesday to fix privacy violations that include overcollecting users’ personal information.

Why it matters: China has increased scrutiny on how private companies handle the data of its nearly 1 billion internet users.

• The country’s latest Five-Year Plan set out goals to develop systems and standards for data security rights and protections, as China pushes its digital economy.
• The amount of data that companies collect has become a major concern for Beijing. Regulators have led several crackdowns on the digital sector aiming to curb rampant data collection.

READ MORE: The loophole in China’s privacy regime: anonymization

Details: China’s Ministry of Industry and Information Technology (MIIT) said on Friday the companies had overcollected personal information and misled users into downloading their software.

• The MIIT said that the companies had been notified about the issues after an investigation but had yet to resolve the issues. The ministry has given the firms until Wednesday to deal with the violations.
• Apps included on the list include DJI GO 4, iFlyTek’s speech-to-text dubbing platform Peiyin, and Tencent’s mobile security app.
• The 136 apps are the third batch of the MIIT has cracked down on so far in 2021, according to the ministry.

As China’s legislature prepares to meet tomorrow, we’re bringing you a special edition of our Insights column: a preview of tech in the 14th Five-Year Plan. We’ve looked through the last plan, and the documents describing priorities for the new one, to give you our baseline expectations for key tech areas in the new plan.

Greetings from Beijing, where the weather is just turning to spring, the air this week feels like taking a bath in an ashtray, and, across town, about 3,000 people are getting together Friday to kick off the annual meeting of China’s national legislature.

This is one of the big meetings: This year, the National People’s Congress will approve China’s 14th Five-Year Plan, which will set out the government’s economic priorities for the next half-decade. The meeting lasts from March 5 to March 11, and in previous years the plan has come toward the end of the session.

Technology and innovation are sure to play a leading role. “Innovation-driven development” was one of the first topics addressed in the 13th Five-Year Plan, issued in 2016, and the phrase is equally prominent in previews of the new plan.

What is (likely) new is emphasis on another key phrase: “self-sufficiency.” As the US has used its control of key technologies as a weapon, China’s efforts to produce its own have a new urgency.

For people with tech projects, the start of a new plan period means opportunity. The “money spigot” for homegrown tech and innovation is likely to get even more generous, said Uny Cao, vice president at the Zhejiang University Intellectual Property Exchange Center and friend of TechNode.

What are we looking for when the new plan is published next week? What’s likely to get the most attention—and which will get less? Below, you’ll find TechNode’s roundup of key mentions of technologies we expect to see highlighted in the 14th Five-Year Plan.

Data

A new approach to data management will reverberate across tech industries. The next stage of China’s tech policy will shift from an emphasis on developing cybersecurity and big data, to building up the data economy.

Mentions in the 13th Five-Year Plan: The last five-year development plan focused on building up cybersecurity and control over data. But it also set goals to get government offices to share data with each other and industry.

• The 13th plan promised crackdowns on black markets for personal data, and strengthened privacy protection for big datasets, including government credit information systems. The government also aimed at opening up government big data to the public through a digital platform.
• The 2017 Cybersecurity Law was the first big step for reform of China’s information security. Implementation of the Multi-Level Protection Scheme, a key part of the CSL, picked up in the summer of 2020, Carly Ramsey, who leads regulatory and political risk consulting at Control Risks in Shanghai, told TechNode. 

READ MORE: Dust has yet to settle two years after China’s landmark cybersecurity law

Expectations in the 14th Five-Year Plan: In the Fifth Plenum guidelines, data has joined an impressive new crowd: “[We will] advance the marketization and reform of the economic factors of land, labor, capital, technology, and data.” When a Communist Party puts you on the same level as labor and capital, you know you’ve made it big.

The Fifth Plenum guidelines call for the development of a rules-based data economy. Or as they put it: Establish basic systems and standards for data property rights, transactions and circulation, cross-border transmission, and security protection to promote the development and utilization of data resources.

“Ensuring the fluid circulation of data is now an economic imperative,” said Kendra Schaefer, head of tech policy research at Beijing-based strategic advisory firm Trivium. “In practical terms, that means that the overarching theme of China’s data policy over the next five years will focus on allowing data to be shared, transferred, bought, sold, and utilized,” Schaefer said. The plenum’s recommendations called for “systems and standards” in data property rights, market mechanisms for data, as well as cross-border data transfers.

READ MORE: China sets the rules for its new data economy

So what? “The 14th Five-Year Plan will mark the beginning of a new era in China’s approach to data policy,” Schaefer said. China is stepping up from the securitization of data resources to developing a system in which data can be exploited as a resource. In the upcoming plan period, we can expect more support for trade in data alongside a continued crackdown on bad cybersecurity practices and insufficient privacy protections.

Environment

One of the biggest components of the 14th five-year plan deals with action to combat the environmental damage that followed years of rapid industrialization and economic growth. In the wake of a vow to set China on a path to carbon neutrality by 2060, economic planners will be under pressure to come up with big changes. China’s tech sector stands to benefit: To reach the country’s emissions goals, investment in clean technology could reach $16 trillion in the next 40 years.

In the 13th Five-Year Plan: The 2016 plan laid out targets to reduce carbon emissions by cutting the country’s carbon intensity—the amount of carbon dioxide produced for every unit of GDP. Through subsidies, state planners pushed prices in the solar industry so low that it effectively went from being a high-tech sector to a commodity business.

• The document laid out action plans to combat air, water, and soil pollution. By last year, Chinese cities were expected to meet “good” air quality standards for more than 80% of the year. 
• The plan sought to reduce the country’s reliance on coal-fired power plants, and promote environmentally friendly construction and mining. 
• Also included were “improvements in supportive policies” for renewable energy sources.

Expectations: The new plan will likely clarify how China will reach peak carbon emissions by 2030 and carbon net zero by 2060, goals laid out to the UN General Assembly by President Xi Jinping in September.

• The thrust of Xi’s speech has been factored into energy and environmental planning in the new five-year plan.
• The new plan will likely outline ambitious capacity and consumption targets for wind and solar energy production, while placing further caps on coal-fired power plants. 
• Energy storage is also expected to play an important role in the new plan, as China seeks to improve grid and power security. 
• It is unlikely that there will be a move away from carbon intensity caps to hard carbon caps, as the country attempts to balance economic growth and cutting emissions, analysts said. 
• While the last five-year plan placed emphasis on reducing emissions from energy production, the new plan will place increased focus on minimizing pollution from industry, including steel and transportation. 
• Further integration between China tech and energy industries is expected, a goal laid out in the 13th five-year plan. 

So what? The world is waiting to see how China plans to reach its emissions targets by 2060. We expect the plan to create more targets and pressure on local governments to improve carbon emissions, but details on how these will be implemented—and how cleantech investment will be affected—will likely be spelled out in lower-level plans.

Autos

A pillar of China’s economic growth, the automotive sector has long been dominated by well-established foreign brands, which hold more than 60% of the market share, while domestic automakers are concentrated in the low-end segment. But that is changing as China’s strength in electric vehicles is boosting its position on the global industry value chain, thanks to strong policy support over the past five years.

In the 13th Five-Year Plan: When China’s cabinet in 2010 initiated a development plan (in Chinese) for seven strategic emerging industries, new energy vehicles (NEVs) was one of them. In 2016, Beijing set an ambitious target of 5 million sales of NEVs in the coming five years, a number which would mark the beginning of mass adoption. This initiative became part of Beijing’s larger goal of becoming the world’s next innovation powerhouse.

• The central government carried out a series of stimuli to foster a new source of economic growth—by offering subsidies for NEV purchases, especially for all-electrics and plug-in hybrids—in both public and private transport sectors.
• China’s top policymakers also vowed to achieve major breakthroughs in battery technologies, such as a higher energy-density level, which enables a longer driving range as well as better resistance to extreme temperatures.

Expectations: NEVs were briefly mentioned as one of the strategic emerging industries in the fifth plenum guidelines, but with no detail about the growth outlook.

• However, according to a policy paper released by the State Council in November, NEV sales were projected to account for 20% of total new car sales by 2025, up from the 2020 level of just 5.4%.
• Beijing also expected “significant improvement in the competitiveness” of its homegrown players in the fields of battery safety and in-car operating systems, among others, while promoting highly autonomous vehicles for commercial use cases in pilot programs. 

So what? China’s electric vehicle market staged a strong rebound after disruptions caused by the Covid-19 pandemic last year and has remained the world’s biggest market since 2014. However, there have been bumps on the road, including electric car fires and the ongoing auto chip shortages.

China also lags the US in the vehicle autonomy competition, raising calls for more effort put toward core technology advancement. Pledging for quality growth amid rising superpower tensions in the next five years, Beijing would have to stay the course in boosting the sector, while realizing little near-term profit.

Semiconductors

Chinese leaders have long vowed to achieve “self-reliance” in strategic technologies, and semiconductors are one of the priorities. The sector is expected to get major attention as China issues its development blueprint for the next five years.

In the 13th Five-Year Plan: The five-year plan ending in 2020 saw semiconductors, along with other high-tech sectors like robotics, smart transportation, and virtual reality, as “new areas of growth” for the nation’s economy, but didn’t make production of semiconductors a strategic priority.

• Priorities certainly have changed over the past five years as Chinese leaders realized how troublesome it is to rely on foreign imports of semiconductors. Huawei is a brutal example.

Expectations: In 2015, China set a goal to make 70% of the chips it uses by 2025 as part of its “Made in China 2025” initiative. Now the question is how China will achieve that goal. The country only produced 6% of the semiconductors it consumed in 2020.

• The fifth plenum vowed to implement a series of “foresightful and strategic” technology research projects including integrated circuits, quantum information, AI, and neural science.
• Despite the industry’s importance, the National Development and Reform Commission didn’t include semiconductors on a list published last September of “strategic emerging industries.” Electric vehicles and artificial intelligence were on the list.
• The central government will increase investment in the domestic semiconductors industry through vehicles like the National Integrated Circuit Industry Investment Fund.
• More favorable policies towards domestic chip companies are likely such as tax breaks and heavier tariffs on imported electronic components.
• Bloomberg cited sources as saying that Beijing has added in a draft of the 14th five-year plan “a suite of measures to bolster research, education, and financing” for the semiconductors industry. 

E-commerce

E-commerce falls under the broader concept of the digital economy, a major theme in the plan that also covers 5G, artificial intelligence, and big data. E-commerce is expected to play a greater role in driving China’s economic growth in the next plan period.

In the 13th Five-Year Plan: The development plan that ended in 2020 set out to expand the e-commerce sector by facilitating its deep integration with traditional industries and prioritizing its governance. China sought to integrate e-commerce into various areas including education, healthcare, culture, and tourism to drive innovation.

• The 13th five-year plan set out expectations for China’s e-commerce transactions to exceed RMB 40 trillion ($6.19 trillion) in 2020, the last year of the plan—double the transaction value in 2015. The figure includes RMB 10 trillion from online retail businesses. The sector was projected to employ more than 50 million people by the end of 2020.
• The period of the 13th plan showed mixed results for e-commerce. The country missed the plan’s goal of RMB 37.21 trillion in e-commerce transactions in 2020. Online retail sales hit their target, however, totaling RMB 11.76 trillion in 2020, data from the National Bureau of Statistics showed.

Expectations: China expects online commerce to continue supporting its macro strategies, notably poverty alleviation and the One Belt One Road initiative. E-commerce has become an important means for China’s rural dwellers to sell their agricultural products. With more free trade zones on the horizon, China looks to expand its cross-border e-commerce market in the next five years.

• As a booster for both domestic and international commerce, the industry plays a central role in goals set for the “dual circulation” concept, which refers to spurring domestic as well as global demand, creating circumstances where the two boost each other’s growth. The idea featured predominantly in recent policy statements, although the term has been a policy meme for several years.
• Chinese regulators are stepping up monitoring for unfair competition and monopolistic practices.
• Consulting agency Jiuhou Zongheng has forecast that China’s e-commerce transactions will reach RMB 50 trillion by 2024.

Blockchain

Blockchain could be a new item in the 14th plan. It’s had plenty of attention at top levels in the past year.

In the 13th Five-Year Plan: Zilch. Blockchain was not on top policymakers’ agenda back in 2016.

Push from the top: The technology had its breakout moment in Chinese policy in October 2019, when President Xi Jinping praised the technology at a Politburo study session.

• Since then, local governments have embraced blockchain governance projects and tried to spur innovation in the field.
• The National Development and Reform Commission is supporting the development of the Blockchain Services Network, an “internet of blockchains.”

No crypto: Chinese regulators are not big fans of one of the technology’s most popular applications: cryptocurrencies. The past year’s clampdown on unregulated cryptocurrencies “is meant to clear a path to regulated forms of digital assets, starting first with DCEP [the central bank’s R&D project that includes the digital RMB],” said Michael Sung, co-director of the Fintech Research Center at the Fanhai International School of Finance at Fudan University, told TechNode.

Expectations: The technology was not mentioned in the 14th plan guidelines issued after the Fifth Plenum.

• The cryptocurrency mining industry might be negatively affected by financial de-risking campaigns and sustainability goals. The industry consumes vast amounts of electricity and is dependent on volatile crypto assets. 

READ MORE: Inner Mongolia may ban crypto mining: Blockheads

So what? China is already very interested in blockchain, but has not given the technology the same level of support as, say, electric vehicles. A name-check in the 14th plan would seal its status as a key technology and could pave the way for a national blockchain roadmap.

Antitrust

China has recently tightened antitrust regulations on tech companies. Regulators started at the end of last year to look at tech giants’ market dominance and to use anti-monopoly tools to limit them. The country also changed antitrust laws and rules to better rein in big tech. As top leaders of China repeatedly vow to “strengthen anti-monopoly” and “rein in disorderly capital expansion,” what has affected tech companies so far seems to be just the start of severer crackdowns.

In the 13th Five-Year Plan: The 13th development plan mentioned breaking industry monopolies and rooting out market barriers. It also intended to establish an “efficient antitrust law enforcement system,” deepen international antitrust law enforcement cooperation, and check administrative monopolies.

• In 2018, China created the State Administration for Market Regulation (SAMR), a  trustbuster that centralized antitrust power previously dispersed among  four market regulators.

Expectations: China is already on the move to rein in big tech with anti-monopoly tools. If the new plan pushes government agencies to impose stricter antitrust regulations and break monopolies, tech giants like Tencent, Alibaba, and Bytedance may feel a lot more pain.

• China’s antitrust regulator drafted an amendment to the Anti-Monopoly Law in January 2020; China may push to finalize the law during the period of the 14th five-year plan.
• The fifth plenum also called for the establishment of an “efficient antitrust law enforcement system” and to “break industry monopoly.”
• SAMR has said tightening antitrust regulations leads the 2021 agenda for the agency.
• While companies like Tencent and Alibaba are already under the spotlight, SAMR may launch more antitrust investigations into big tech companies. 
• A few antitrust lawsuits between tech companies are set for court hearings this year. Among them are the Douyin vs. WeChat, and JD.com vs. Alibaba cases. The results of cases will provide precedents for how the antitrust rules that took effect in February will be interpreted by the courts.

Rural areas and agriculture

Agriculture, the foundation for feeding China’s 1.4 billion population, is facing a new round of restructuring and modernization. The countryside is a growing focus for tech companies because it is home to a group of maturing consumers as well as being a lower-cost manufacturing hub. That makes aligning with rural developments a big goal for these internet firms.

In the 13th Five-Year Plan: The last plan placed a high priority on continuous modernization of rural areas and the agricultural sector. The plan promoted integration of agriculture and e-commerce and encouraged the application of big data and internet of things tech in agriculture.

• President Xi Jinping announced China’s “complete victory” in eliminating “absolute poverty” at a grand gathering held February 25 in Beijing. In the past eight years, nearly 100 million rural residents were lifted from poverty, Xi says.
• Tech giants including Alibaba, Pinduoduo, and Didi Chuxing were rewarded for contributions in the poverty alleviation initiative.

Expectations: China is expected to continue to focus on improving the quality, safety, and profitability of the sector, goals that require technological assistance.

• The focus of China’s agricultural development will shift from increasing production to improving quality, according to The China Agriculture Outlook (2020-2019) released this past April.

Policymakers are counting on tech in a plan to improve both farmers’ output and their incomes, said Even Pay, an associate director at Trivium:

“Policymakers are preparing for a future where there are fewer farmers. Some of them may be older, and in need of equipment to make their jobs easier. They also hope to attract some young people back into farming by making the work easier and more interesting—like operating ag machinery or flying drones.”

“Another big reason the government is supporting agtech is the “dual circulation strategy”—which looks to make domestic consumption the main driver of China’s macroeconomic growth. Right now China’s rural areas have the greatest growth potential of anywhere in the country—provided farmers’ incomes go up.”

Fintech + digital yuan

Fintech and the digital yuan might get a direct mention in the 14th plan.

In the 13th Five-Year Plan: Fintech was directly mentioned only once in the last plan. That plan called for a risk monitoring and crisis management system for all financial activity, including “internet finance.”

• “Microfinance,” “inclusive finance,” and “green finance” were included in the plan, but these categories also refer to traditional financial tools, said Jonas Short, head of the Beijing office at Everbright Sun Hung Kai.
• The plan called for microfinance to be made more “transparent” and regulated, while “Internet+inclusive finance” was to be promoted, and a green finance system was to be set up.
• The 13th plan also mentioned the development of “multilayered” and “non-cash” “payment systems,” although it didn’t mention digital payments specifically.

Fintech development: Since the release of the 2016-2020 plan, the use of fintech has skyrocketed, and an overwhelming majority of Chinese citizens now make use of some sort of digital finance, whether that’s for lending, investment, or insurance.

• The Ministry of Commerce released a fintech development plan in 2017, focused on cybersecurity, digital payments, and risk prevention.  
• As big tech came to play an increasingly important role in China’s finance, especially with regards to consumers and SMEs, authorities started laying down the rules: In 2020, Chinese regulators ramped up their efforts to regulate fintech companies, especially after Ant Group’s IPO was suspended in November 2020. Rules for microlending, antitrust, and digital payments have been released since.

Digital yuan: China’s central bank has been working on a digital form of cash, the digital yuan, since 2014. If implemented, it will be the first state-backed digital currency by a major economy. The central bank appears to have accelerated the development of the currency in 2019 after Facebook announced its Libra project. Trials for the e-CNY started in late 2020 in four Chinese cities: Chengdu, Shenzhen, Suzhou, and Xiong’an.

Expectations: The guidelines directly called for the improvement of “the level of financial technology.” They also included language similar to the previous plan’s regarding inclusive and green finance, as well as on financial risk prevention and monitoring.

• The guidelines called for continuing R&D on digital currency.

So what? China’s fintech industry will continue to grow, especially given a lift in the 14th plan. But incumbents will face more competition as a result of antitrust regulations and the opening up of payments systems that DCEP will bring. Tech companies dabbling in finance will also be increasingly brought under the fold of financial regulation.

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, James and Elliott are joined by TechNode’s own Eliza Gkritsi. Eliza gives an update on how Ant Group’s fate may change as a result of new regulations. She also gives her takeaways at this current point of China’s digital currency rollout. The conversation also touches on China’s crypto-mining industry, and the rig-makers who have been benefiting from Bitcoin’s latest bull run.

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping

Hosts:

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

Guest:                   

• Eliza Gkritsi – @egreechee

Editor:

• Peter Isachenko

Podcast information:

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

China is the world’s biggest polluter. Rivers around some of the country’s largest cities have become unfit for human use. Urban areas produce mountains of waste. And—most important to the rest of the world—China’s carbon emissions have increased fourfold in three decades. 

Meanwhile, between 2010 and 2018, the number of pollution sources in China rose by half, according to China’s environmental ministry, increasing from 5.9 million to 9 million in less than a decade. These include polluters of air, water, and soil. Of that total, 7.4 million are industrial sources. 

Now, Beijing is taking forceful action. In September, Chinese President Xi Jinping surprised the world by announcing that China would dramatically reduce its carbon footprint in the next 40 years, effectively cutting net emissions to zero. The commitment follows years of tightening policies aimed at reducing carbon intensity. 

Xi did not give any details on immediate targets, which are expected to be included in China’s new five-year plan, set to be released March 5. If fulfilled, the pledge could drastically reduce global carbon emissions and slow global warming while creating a $16 trillion industry in the next 40 years, driving investment in green technologies. To reach its goal, China will have to overhaul its economy—and rally its tech sector. 

We’ve been asking ourselves how China’s tech sector will play a role in this transformation. That’s why we’ve decided to start this newsletter. For the next few months, we’re going to take you on a deep dive into clean technology, or cleantech, in China. We’ll be identifying promising technologies and companies, and looking into who is investing in the industry. 

We will support green technology innovation, promote clean production, develop the environmental protection industry, and promote green retrofitting of key industries and important fields.

China’s 14th Five-Year Plan guidelines, published in November 

What is cleantech?

What do we mean by cleantech? The name is applied to everything from energy production to trash sorting startups. We’ve decided to go broad and thematic, so we’ll hazard a broad definition: Cleantech encompasses technologies that reduce our negative impact on the environment by improving energy efficiency and using resources in a more sustainable way. 

Within this scope, we’ll find a lot of activity. In 2016, Chinese lawmakers announced plans to rapidly decrease pollution, calling for “significant integration” between the country’s energy and tech sectors. At the same time, authorities laid out plans to create green cities, complete with electrified transport and eco-friendly buildings. 

Underpinning these projects is a smorgasbord of new construction technologies, smart waste management systems, new energy vehicles, air treatment and carbon capture technologies, better water treatment, new forms of distributed energy production, and energy storage. 

Deployment

Several of these technologies have already been deployed around the country. In 2019, the Chinese government rolled out smart trash-sorting systems in a mass recycling push aiming to cut down on municipal waste. These devices began appearing in cities around the country amid the government’s mandatory trash-sorting campaigns. They aim to lessen the effort involved in the recycling process. 

One company that runs the automatic waste-sorting stations is Dog (Xiaohuanggou). The firm has raised more than RMB 1 billion and operates in 41 cities around China. It has 6 million registered users, according to its website (in Chinese). 

Meanwhile, Alibaba affiliate Ant Group started providing services to connect its users with online recycling platforms, allowing them to sell their recyclable waste to these companies.

Mobility has long been a significant focus, particularly as a means of reducing carbon emissions. China has subsequently become the biggest electric vehicle (EV) market in the world. Private companies and the government have rallied to set up a network of EV charging stations to match the scale of EV sales. 

The country is now home to 807,000 charging stations, though growth up to this point has been slow. Meanwhile, EV makers like Nio have experimented with battery swap systems. The aim is to reduce worries about the range of EVs by attempting to reach access parity to gas stations and electrify China’s auto sector. 

China has already invested more than any other country in cleantech, and shown that when the state backs an industry, it can get results. Apart from being the world’s biggest EV manufacturer, it is also the world’s largest producer of solar panels. Unlike its EVs, which are largely sold in the domestic market, China supplies the world with tech needed to harness the sun’s energy.

JinkoSolar is one example. The New York-listed company expected to sell 19 gigawatts of solar panel capacity in 2020, according to its third-quarter earnings call. That figure represents around half of all the solar capacity installed in China during 2020. 

China, and companies like JinkoSolar, have driven the price of solar panels so low that they are now barely considered tech. 

Huge investments

Nonetheless, China’s government and private enterprises are going to have to do a lot more if national emissions goals are to be reached by 2060. In order to hit the country’s net zero-goals, Chinese investment could reach up to $16 trillion by 2060— generating perhaps 40 million jobs, according to a report by Goldman Sachs. 

The company’s analysts expect investment to peak at $650 billion in 2040. That would represent up to 2% of China’s GDP for that year. 

Meanwhile, researchers from China’s prestigious Tsinghua University have made similar predictions, saying that the country would need to spend RMB 100 trillion ($15 trillion) over the next 30 years to reach carbon net zero by 2060. 

On Feb. 1, the country rolled out a national carbon trading system to reduce carbon intensity. Participation is currently mandatory for companies in the energy sector, and allows these firms to buy and sell emissions credits. A company enrolled in the system must either meet its emissions targets or buy credits from other firms that have been more successful at lowering their emissions. The government is expected to expand the trading system to other industries in the future. 

Caps on emissions and programs that reduce intensity such as this could prompt investment in eco-friendly technologies, further spurring investment in tech that cuts emissions. 

Numerous Chinese venture capital firms have been established to fund startups focused on clean technologies ranging from energy generation and efficiency to sustainable agriculture. One of these companies is Tsing Capital. The firm has invested in a slew of startups that have become household names in cleantech, including drone maker eHang, China Hydro, and US-based Lucid Motors.

Coal and construction

China has a long way to go to clean up its pollution. The country has spent big on solar panels but has struggled to ditch coal. It continues to rely on one of its mosted trusted, but dirty, methods of stimulating the economy. 

Construction is huge in China, accounting for around 7% of China’s GDP. In times of crisis, the country accelerates spending on infrastructure projects to stimulate the economy. In 2008, after the global financial crisis, the country pushed spending on massive road and rail developments.

Now, it’s doing the same to mitigate the economic effects of the coronavirus pandemic, spending hundreds of billions of yuan on some of its most ambitious projects. 

But infrastructure investment has consequences. More than a third of all pollution around the globe is generated by construction and buildings—and China is the most prolific builder in the world. In China, that share appears to be lower, with some research indicating that China’s construction industry could be responsible for only a fifth of its total carbon emissions. 

The country is actually building coal-burning power plants, partly as a means to drive its post-COVID-19 economy. In 2020 alone, China’s power industry proposed adding nearly 41 gigawatts of coal-burning capacity, according to an analysis by the Global Energy Monitor and the Centre for Research on Energy and Clean Air (CREA). That figure is the equivalent to the output of all the coal-burning power stations in South Africa. The central government may attempt to rein in construction of these power sources in the upcoming five-year plan. 

Pressure to act

Meanwhile, several government agencies have failed to buy into environmental protection policies and to promote low carbon energy sources. The central government is finally reacting. In a harshly worded report last month (in Chinese), government inspectors hit out at the China National Energy Administration (NEA), the country’s energy authority, for failing to protect the environment and for building coal power plants in polluted areas. 

This is as big as it gets in China’s energy policy … the final report is brutal in calling out failure to rein in coal.

Lauri Myllyvirta, lead analyst at CREA, who has written about China’s environmental policies, on Twitter 

The NEA is not alone. China’s forestry agency was criticized for not providing sufficient environmental protections to improve forest quality. The government inspection group has also censured officials from six cities on branches of the Yangtze River for failing to deal with pollution leaking into the Yangtze River Basin. These areas included Suining in China’s southwestern Sichuan Province and Xiaogan in the central Chinese province of Hubei. 

But as the country’s current five-year plan winds down, there appears to be a real push to move the needle on emissions. This will mean even bigger investments in clean technology. 

We’ll be back next month with a look at the biggest players in China’s cleantech industry. 

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, James and Elliott review the winners and losers of 2020, what they got right and what they got wrong, as well as the lessons they learned. They also look forward to the rest of 2021, anticipating trends, as well as companies to watch. They discuss Bilibili, Alibaba, Ant, Xiaomi, Baidu, and more.

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping

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

On Nov. 11, 2019, Chinese people collectively bought more goods online than the population of any country on any other day since the invention of the internet—or of commerce, for that matter. 

Known as Singles Day, the promotion is China’s biggest annual online shopping festival, and eclipses the sales of the US’s Black Friday and Cyber Monday combined. In 2020, merchants on online platforms including Alibaba’s Tmall and Taobao, JD.com, and Pinduoduo, sold more than RMB 330 billion (around $51.3 billion) worth of goods in 24 hours, significantly lower than in 2019, according to data from China-based data services company Syntun.

That figure, known as gross merchandise volume (GMV), is equivalent to the price of more than 900,000 China-made Teslas or 6,600 of China’s homegrown passenger jets.

Platforms that report GMV make a big deal out of it. E-commerce companies plaster live totals on massive screens at media events and push these figures to investors as beacons of growth. But longer-term numbers are usually released only annually. 

Yet, the concept is sneakily deceptive. There is no standard definition for GMV—platforms measure their own sales figures in different ways, essentially creating their own definitions. 

Returns and cancelations

Every penny a customer commits to pay on a platform is counted as part of GMV—whether or not they pay, or later get the money refunded.

Imagine this scenario, a popular one among internet users in China. It’s 11:59 p.m. on Nov. 10. You have one minute to go until Singles Day promotions begin. Your shopping cart is full, stocked with items whose prices will fall as soon as the clock strikes 12. But, in the back of your mind, you wonder if you should be buying RMB 5,000 worth of goods. 

The moment comes. You quickly tap the pay button before your precious goods sell out. It’s done—your bank balance falls by RMB 5,000, while Alibaba books another RMB 5,000 in GMV.

But in the morning, you wake up feeling guilty. Slowly, you realize that you probably don’t need another winter coat, so you cancel the order.

Down in Yiwu, the merchant doesn’t mind too much—in fact, it helps them climb in search results. They’re busy buying and canceling thousands of orders for the same coat from dummy accounts, boosting their rank. 

Meanwhile, in Hangzhou, Alibaba’s GMV ticker keeps rising, undeterred by thousands of similar cancellations that may be processed every minute. In fact, that ticker will never fall, because GMV totals include all transactions on a platform, even when those goods are cancelled or returned. 

According to Alibaba’s 2019 annual report, the company GMV figures include all orders for products and services on its platform regardless of whether items are actually sold, delivered, or returned. Rival e-commerce platforms JD.com and Pinduoduo also include unfulfilled orders in their GMV totals. 

“Like other measures of economic scale, such as GDP, GMV is imperfect. Depending on the company definition, it can include unpaid orders, orders that have been added to cart but ultimately not purchased, cancelled orders, or returned orders,” Michael Norris, research and strategy lead at AgencyChina, told TechNode. 

Aside from including cancelled or returned orders, Alibaba, JD.com, and Pinduoduo all include shipping costs in their GMV calculations, further inflating sales volume. 

The metric may be flawed, but it’s the only game in town when it comes to shopping festivals.

GMV calculations have even led to spats between rival e-commerce platforms. In 2017, Alibaba’s public relations head mocked JD.com for releasing an extended 11-day sales figure, as it always does. JD.com racked up RMB 127 billion in GMV between Nov. 1 and Nov. 11 while Alibaba’s figure reached RMB 164 billion in 24 hours.

JD Retail’s then chief marketing officer and now CEO, Xu Lei, hit back at the e-commerce giant, saying that Alibaba’s 24-hour GMV figures were driven by pent-up consumption from users all looking for a discount on one day of sales. Alibaba has now extended its Singles Day promotions to 11 days. 

Fake orders

Beyond all of the generous inclusions in GMV, there is something more insidious that boosts sales metrics: brushed orders. Here, stores on e-commerce platforms pay people to order items that are very cheap or are cancelled later. A store’s motivation can be higher seller ratings or increased visibility of their products in search results. 

China’s government is attempting to root out brushed orders. In June, Beijing tax authorities sent out alerts to a group of nearly 2,000 merchants who were required to make supplementary tax payments based on inflated numbers that resulted from brushed orders. The government has also proposed a law that would make merchants liable to pay tax on falsified sales.

“Brand retailers nowadays don’t do much of that anymore, but small mom-and-pop merchants use brushing as a service to market their products during [shopping] festivals, ” said Li Junheng, founder of JL Warren Capital, a China-focused equity research firm. 

Investors are aware of the pitfalls of the GMV figures e-commerce platforms report and attempt to adjust for brushed and unfulfilled orders to get a better sense of what a company’s “real” GMV may be. 

“I typically apply a discount rate of between 20% and 40%, depending on the platform,” said AgencyChina’s Norris.

Investors also get around misleading numbers by comparing figures year on year, as opposed to using the absolute values. 

Keeping up with the times

With the pandemic, livestreaming sales hit the big time, and it’s only expected to become more popular. The explosion in popularity could create even more problems for people trying to separate the signal from the noise in GMV figures. 

The problem? Livestream purchases have extremely high return rates, more so than any other type of purchase. 

“A general rule of thumb is that the GMV sold during livestreaming sessions have the highest return rates, as they target compulsive shoppers,” said Li. Depending on the category, up to 50% of all purchases are returned. The effects can be at their worst when livestreams are hosted by online influencers, who have an incentive to book as many orders as possible to boost their value as advertisers. 

According to Alibaba, more than 30 livestreaming channels on its platforms generated in excess of RMB 100 million in sales each during last year’s 11-day Singles Day shopping festival. Over 500 channels generated RMB 10 million each during the same period. 

The figures will only increase. KPMG expected livestreaming e-commerce in China to reach more than RMB 1 trillion in 2020, up from RMB 430 billion in 2019. With half of all goods being returned, reported GMV metrics could become far less useful to gauge a platform’s scale. 

“Over time, as livestream e-commerce becomes a bigger chunk of the overall e-commerce pie, analysts will need to adjust the discount rate they apply to platform GMV,” said Norris. 

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’s guest is Capucine Cogné, a real estate industry specialist based in Chengdu who has been following the rise and fall of China’s “second landlord” platforms. She discusses what led to their rise, the unique circumstances of their fall, and who might stand to benefit as the industry now consolidates.

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping

Hosts:

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

Guest:                   

• Capucine Cogné

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, Tu Le from Sino Auto Insights joins the show to discuss the stratospheric rise that electric vehicle stocks have experienced this year, and what those firms will need to achieve in order to justify their share prices. They also discuss the major players on the software side of the EV equation. 

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

Watchlist:

• Tencent
• Alibaba
• Baidu
• Bilibili
• Xiaomi
• JD
• Pinduoduo
• Meituan-Dianping

Hosts:

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

Guest:                   

• Tu Le – @sinoautoinsight

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, Michael Norris is back for his regular earnings check-in, as the guys go over the calls from Bilibili, Pinduoduo, and Tencent, including Bilibili’s formula for success, and the increasingly intense debate between Pinduoduo’s longs and shorts.

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

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

What do the global empires of China’s tech giants look like? I began asking myself this question months before starting Expanding Empires, a reporting effort to map out the global tech investment footprint of China’s biggest investors. Now, we’re bringing it to an end.

Over the past six months, I’ve scraped, analyzed, and visualized data to provide a better picture of where China’s biggest tech companies are investing, how the geopolitical climate has led to dramatic shifts in their focus, and where they might be headed next. 

Funding rounds in which Chinese tech companies have participated—or in numerous cases, lead—have created some of the world’s biggest tech giants. In the US, these include mobility companies Uber, Tesla, and Lyft; in India, Paytm, Flipkart, and Bigbasket; and in Southeast Asia, e-commerce giants Lazada and Sea Limited. 

For the final edition of Expanding Empires, we look back at where overseas China tech investment started, how things have changed, and where it’s going. While each company has its own trajectory, there are some broad trends that appear to be defining China’s involvement in the global tech industry. 

The early days

It all started in the US. In 2008, just months before the housing bubble burst, before Lehman Brothers collapsed, before the global economy plummeted into a deep recession, Tencent bet on a little-known gaming studio in San Francisco. 

An $11 million investment in Outspark set the tone for Tencent’s rapid expansion abroad. The Chinese company would soon become the biggest gaming firm in the world. But more importantly, the investment marked the beginning of China’s scramble for a foothold in the US tech industry.

By 2015, seven years after Tencent’s first US investment, Chinese tech giants including Tencent, Alibaba, Baidu, and Xiaomi had taken part in nearly 40 funding rounds worth a combined $2.4 billion for US companies. 

China’s investment footprint in the US was largely driven by Tencent and Alibaba, and some of the funding rounds in which these companies took part were massive. In 2016, Alibaba participated in a $1 billion round for mobility firm Lyft. Two years later, Tencent took part in a $9 billion round for Uber. 

The list of big ticket names goes on: Tencent invested in Tesla, Reddit, and Universal Music Group. Alibaba plowed money in Magic Leap, Snap, and participated in several rounds for Lyft. 

Tencent is unique among its Chinese counterparts—it’s far more global. The company has funded more than 140 companies outside China—double that of Alibaba. Many of these were early-stage investments. 

2015 to 2017 marked a spring in Chinese tech investment in the US. By the end of 2017, Chinese companies had taken part in more than 100 rounds for US companies, totalling more than $9 billion. 

But by 2018, that had all begun to change.

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The great switcheroo

Chinese tech companies’ investments appeared to be paying off. Valuations of companies they had invested in soared. They were participating in funding rounds with unprecedented frequency. 

In 2016, Alibaba, Tencent, and Baidu took part in 20 rounds for US companies. But by 2019, that had fallen to a meagre three. 

What had happened? One reason is the allure of Asia’s developing markets. But another is politics.

The Trump administration had become increasingly critical of China, and began pushing back against some of the country’s biggest tech companies. Chinese telecommunications giants ZTE and Huawei quickly fell victim to US scrutiny. Washington’s offensive nearly killed ZTE after the company was found to have violated American sanctions against Iran and North Korea.

But the scrutiny also extended to foreign investments in the US—particularly those that came from China. 

In late 2018, the US changed its foreign investment rules and began scrutinizing deals for non-controlling stakes in US firms. Previously, investment reviews only took place when a foreign firm took a majority stake in a US company. 

The changes were directed firmly at Chinese companies, as lawmakers feared their investments were abetting tech transfers from the US to China. 

The US-China Investment Project estimates that Chinese venture funding in the US totaled $400 million in the first quarter of 2020, down from $640 million during the same period in 2019, and $1 billion in 2018. A global pandemic beginning in China also contributed to this fall.

The resulting dropoff in investment was “distinctively Chinese,” according to a report by the US-China Investment Project. Despite the decrease in Chinese investment, overall funding of US startups largely remained the same. 

Driven away from the US by increased regulation and attracted by the potential of big returns from developing markets, China tech quickly turned to the other side of the Pacific, honing in on South and Southeast Asia. 

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Alibaba had seen potential for growth in Southeast Asia and India for years. In 2016, the company bought Southeast Asia’s biggest e-commerce company: Singapore-headquartered Lazada. 

The deal was Alibaba’s biggest overseas investment. It followed up a year later with another $1 billion investment, upping its stake from 51% to 83%. Then, in 2018, it plowed in another $2 billion.

The move to Southeast Asia coincided with its pull back from America. Between 2010 and 2015 Alibaba participated in 17 US-based rounds. But since 2018, that number dropped to five. During the same period, Alibaba has taken part in 19 rounds in India and eight in Southeast Asia.

Tencent made similar moves, though the majority of its investments are in the US. The company first invested in Southeast Asia in 2016, when it participated in a round for internet platform provider Sea Limited for an undisclosed amount. It followed up with an additional $1.4 billion round in 2019. Sea runs some of the region’s biggest online platforms including e-commerce service Shoppee and gaming platform Garena. 

Tech investment proxy wars

Since then, Tencent and Alibaba have divided up Southeast Asia and India. The battle between these two companies—as well as Xiaomi—is focused on fintech and e-commerce.

Despite Alibaba and Tencent operating their own digital payment platforms in several countries across Southeast Asia, the two companies have backed more than a dozen e-wallets in the region and India—and no one startup is backed by both.

Alibaba and Tencent have taken different approaches when backing e-wallets. While Alibaba backs a mix of conglomerates that run e-wallets as part of a wider business, as well as fintech-first companies, Tencent has only backed the conglomerates. 

In Southeast Asia, on the side of Alibaba and its fintech affiliate Ant Group are Myanmar’s Wave Money, Thailand’s Truemoney, as well as Lazada and internet service platform Grab, which run e-wallets as part of their business. In India, the two Chinese companies have funded Paytm. 

Meanwhile, Tencent has backed Sea Limited, which operates Airpay and Shopeepay; Gojek and its Gopay system in Southeast Asia; as well as Swiggy Wallet and Ola Wallet in India. 

But it’s not just fintech. For Chinese companies, the stakes for tech investment are high in India and Southeast Asia at large.

“These investments are building the muscles for a world-class clash of titans—with the big guys competing head to head and local players serving as proxies for the foreign giants,” consultancy Bain & Company said in a report describing the scramble for market share in the region.

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Untapped markets

While the US has made it more difficult for Chinese companies to invest and competition in Southeast Asia heats up, another market has caught the attention of China’s tech companies: Africa.

Home to 1.3 billion people and six of the world’s ten fastest growing economies, the continent has a thriving tech scene. Firms like Huawei and ZTE have a long history in Africa. Roughtly 70% of all 4G base stations on the continent are made by Huawei.

But as connectivity across the continent improves, other Chinese companies have seen opportunities in providing—and backing—digital services. 

Tencent, gaming giant Netease, Meituan, and smartphone maker Transsion have already bet on African companies. Meanwhile, Alibaba has taken a different approach by launching training programs for aspiring African entrepreneurs. 

Their presence on the continent is still modest, but has grown steadily since 2018, with 2019 seeing record amounts of Chinese involvement in Africa’s tech sector. 

“Africa is often still a greenfields continent where Chinese companies have a more equal or better chance to compete,” Africa Analysis’ Dobek Pater told the South China Morning Post last year. 

Transsion, which controls around 40% of the continent’s smartphone market, has started delving into digital services in Africa. In 2015, the company launched music streaming service Boomplay through a joint venture with Netease. Primarily focused on the African market, 85% of its users come from Nigeria, Ghana, Kenya, and Tanzania.

Startups in Africa raised a total of $2 billion in 2019, according to data from global investment firm Partech. While a small percentage of the total came from China, Africa has seen an increase in attention from Chinese investors. 

Chinese-owned, Norway-based software company Opera in 2017 pledged to invest $100 million in Africa’s digital economy. The company later launched Opay, a super app that included payments and delivery services, in Nigeria. 

Meanwhile, Africa-focused fintech platform Palmpay launched in Nigeria after receiving $40 million in investment from Transsion and Netease. The deal also meant that Palmpay would come pre-installed on 40 million on Transsion’s phones this year. 

Ant Group, which runs one of China’s most popular payment platforms, has also taken notice. In 2019, the company partnered with Flutterwave, a Silicon Valley- and Lagos-based fintech company, adding Alipay as a payment method for Flutterwave’s 60,000 merchants. Ant has also partnered with South African mobile operator Vodacom to launch a payments app in the country. 

READ MORE:
China tech in Africa: flip phones to fintech

From sanctions on Chinese companies in the US to uncertainty from app bans in India, Chinese tech investors have had a rough ride. But there have also been many successes. In some cases, the effects of their influence have been subtle, quietly backing startups worldwide. In others, like Alibaba’s takeover of Lazada, their funding has allowed them to take massive portions of a developing market. 

So what’s next? One of the world’s largest continents. Only time will tell how the battles between these Chinese companies, as well as with their US counterparts, will play out. 

For the past ten years, some of China’s biggest companies have divided the country’s tech industry. Now, they’re fighting proxy wars in the emerging markets of Southeast Asia and India, battling it out for a share of the regions’ digital real estate. 

“These investments are building the muscles for a world-class clash of titans—with the big guys competing head to head and local players serving as proxies for the foreign giants,” consultancy Bain & Company said in a report describing the scramble for market share in Southeast Asia.

China’s tech giants are known as jealous backers. When Chinese startups take money from a tech major, they’re often committing to a side and its associated ecosystem. That’s why Tencent invested in Pinduoduo—the e-commerce company’s business model is based on users getting their Wechat contacts to buy items with them.

How much do these proxy wars spill over into Chinese tech giants’ new stomping grounds—Southeast Asia and India? I wanted to know, so over the past few weeks I’ve scraped, cross-referenced, and analyzed public data to map just how divided the digital landscape is in India and Southeast Asia. Here’s what I found:

• Chinese tech majors including Tencent, Alibaba, and Xiaomi have ploughed more than $26 billion into startups in the Southeast Asia and India regions. 
• Very few of the startups have investment from the same Chinese tech giant, dividing the young companies into camps depending on where they received their funding.
• The battleground is predominantly focused on fintech and e-commerce.
• In Southeast Asia, Alibaba, Ant Group, and Tencent have made the biggest fintech investments. Meanwhile, Alibaba and Tencent lead in e-commerce funding in both Southeast Asia and India. 
• Also, in India, Tencent, and Xiaomi have participated in rounds worth more than $2 billion to fund mobility companies. 

In the past five years, companies including social media and gaming giant Tencent, e-commerce firm Alibaba and its fintech affiliate Ant Group, search company Baidu, and smartphone maker Xiaomi have participated in 89 funding rounds totalling nearly $26 billion for Indian and Southeast Asian startups. 

Simultaneously, Chinese investment has shifted away from startups in the US to those in Southeast Asia and India as a result of rising US-China geopolitical tensions.

Funding round totals
Corporate giants jealously guard information about their investments in order to avoid tipping off their rivals. As a result, our data includes the total value of each funding round—a figure that includes contributions from other investors. While the data is incomplete, it still functions as a proxy for undisclosed numbers, and allows us to gauge Chinese tech giants’ stakes in various industries and regions.  

Battle for fintech supremacy

Southeast Asia and India’s underbanked population are driving a fintech boom. 

Underbanked people typically don’t have sufficient access to commercial banking services. But with the advent of digital wallets in the region, they’re able to hail a ride, buy online, and order food for delivery. The higher availability of these platforms then stimulates a need for more fintech services. 

According to Bain & Company, digital payments in Southeast Asia have reached an “inflection point,” with transactions expected to reach $1 trillion by 2025. 

Chinese tech majors don’t want to miss out. While Tencent and Alibaba operate their own digital payment platforms in several countries around Southeast Asia, the two companies have backed more than a dozen digital payment platforms in the region and India. 

These companies collectively account for around 150 million users in Southeast Asia, according to a report by Dealstreetasia. Meanwhile, in India, that number reached more than 350 million in 2019. 

Tencent and Alibaba are each recruiting their own team. No fintech startup in the two regions has been backed by both companies.

We don’t know exactly how much Alibaba and Ant invested into e-wallets—of these investments, most were either for undisclosed amounts or into large conglomerates whose e-wallets are not the whole show. The one disclosed e-wallet investment, into Myanmar’s Wave Money, was for $73.5 million. 

Alibaba has backed companies that are focused solely on digital payments, including WaveMoney and Thailand-based Truemoney, as well as large conglomerates that offer payment services among others, including e-commerce giant Lazada and internet service platform Grab. In India, the two Chinese giants have invested in digital payments platform Paytm. 

Tencent has taken a different approach. The company hasn’t invested in any e-wallet-first companies, but has taken stakes in several large firms that, like Wechat, offer wallets. 

Tencent has taken parts in rounds for Southeast Asia and Indian companies that total $9.4 billion. These companies include Sea Limited, which operates Airpay and Shopeepay; Gojek and its Gopay system in Southeast Asia; as well as Swiggy Wallet and Ola Wallet in India. 

Online services

E-wallets are being used for services ranging from ride-hailing to food delivery to e-commerce. 

In Malaysia, the government is incentivizing use of digital payments by offering MYR 450 million ($108 million) initiative, giving MYR 30 to all Malaysians older than 18 who earn less than MYR 8,333 a month. The incentive can be claimed using a variety of e-wallets, including Grabpay. 

Like the e-wallets, Chinese tech majors are divvying up these digital commerce platforms. 

E-commerce is one major battleground. China’s tech giants have divided up their Southeast Asian counterparts. On the Tencent-affiliated side, we have Singapore-based Sea Limited—a behemoth covering e-commerce, payments, and gaming. On Alibaba’s side, we have Lazada, a Singapore headquartered e-commerce company the Chinese giant acquired in 2016 for $1 billion. 

The same is true in India, where the two companies have bifurcated the country’s e-commerce and food delivery sectors. While Alibaba backed food delivery startup Zomato. Tencent funded Swiggy. While Alibaba backed Bigbasket, Tencent funded Flipkart.

Earlier this year, Zomato was reportedly in talks with Bigbasket to offer groceries on its food delivery platform. Both companies are backed by Alibaba. 

Tencent and Alibaba have participated in rounds for e-commerce companies in the region worth a total of $12.8 billion. This total includes some investments we have already counted above as digital payments digital payments. 

Meanwhile, Chinese lifestyle services giant Tencent-backed Meituan, a far less active international investor than either Alibaba and Tencent, has also backed Swiggy.

Chinese tech firms are not only competing among each other, but also with their US counterparts, including Amazon, Facebook, and Google. 

Ride-hailing boom

With a combined urban population of around 800 million people, getting people from one place to another has become ever more important. Ride-hailing platforms have stepped in to fill this gap. 

Several Chinese tech firms have funded mobility startups in Southeast Asia and India, but there is less of a clear cut divide. Southeast Asia’s two biggest mobility companies, Grab and Gojek, compete head-to-head in Indonesia, Vietnam, Singapore, and Thailand. These two firms also offer a host of other services, including food delivery and payments.

What happens when new giants with connections to Tencent and Alibaba enter the field? Well, it depends: Meituan, backed by Tencent, has joined the older company in backing Gojek and Swiggy. 

Didi is a boundary-crosser—it was formed by a merger between Tencent- and Alibaba-backed ride-hailing firms—but has integrated with the Tencent ecosystem. However, it joined with Alibaba to back Grab.

Gojek has raised $4.8 billion from funding rounds in which Tencent and Meituan took part, while details of Alibaba’s 2018 investment in Grab were not disclosed. Now, Alibaba is reportedly looking to invest $3 billion in the Southeast Asian mobility firm. Chinese ride-hailing giant Didi took part in two of Grab’s funding rounds, worth $2.9 billion. 

In India, Xiaomi and Tencent are dividing up the country’s ride-hailing market. In 2017, Tencent invested in Ola Cabs as part of a $2 billion funding round. Then, earlier this year, Xiaomi backed Oye! Rickshaw—a company that provides last-mile electric rickshaw rides—as part of the company’s $10 million Series A. 

Chinese companies may have a harder time investing in India startups in the future. Indian officials this year launched an offensive banning more than 100 apps operated by Chinese companies and increasing scrutiny of investments from neighboring countries. 

What’s next

For China’s tech giants, Southeast Asia is an important market, and they’re in it for the long haul. Several companies have announced plans to bolster their presence in the region over the next new months. 

Tencent said in September that it had opened a new office in Singapore in an effort to boost its business in the region. Meanwhile, Bytedance reportedly plans to invest billions of dollars and recruit hundreds of employees in Singapore in the next few years. A source told CNBC that Bytedance had already begun moving engineers to the city, with previous reports claim the company aims to set up a data center to back up US data. 

The investment war between China’s biggest tech firms will likely only intensify as companies double down on the region’s burgeoning digital economy. But they won’t just be competing among each other. 

US tech giants are shown interest in investing in the same companies Alibaba and Tencent already have stakes. In 2018, Microsoft invested in Grab. Meanwhile, Amazon may be zeroing in on Gojek and Google is reportedly taking part in a $350 round for Indonesian e-commerce firm Tokopedia—one of Alibaba’s portfolio companies. 

The future battle for Southeast Asia may not be between Chinese tech giants, but US companies and their Chinese counterparts.

Ant Group, Chinese e-commerce giant Alibaba’s payments affiliate, is cutting support and funding to the overseas e-wallet companies it has invested in as the company pulls back from ambitions to become a global leader in payments, Reuters reported.

Why it matters: Ant Group has made headlines over the past few months over its plans for a dual listing in Hong Kong and Shanghai. The company aims to raise $34.4 billion—potentially the largest IPO in history.

• Since 2015, the company has invested in a slew of e-wallet firms around the world as it sought to expand its overseas presence, simultaneously launching its own payments platform Alipay in several markets globally.

Details: Ant Group is now scaling back the hundreds of millions of dollars the company spent each year on its overseas fintech investments, while bringing its support employees back home, according to Reuters’ sources in nine countries.

• The move started in late 2019 as the company began to prepare for its much-anticipated initial public offering (IPO) and grappled with regulatory changes at home.
• Ant has also reportedly hit the brakes on plans to create a global QR code-based payments system that would connect all the e-wallets it has funded.
• The comany has invested in around a dozen fintech companies including India’s Paytm, Myanmar’s Wave Money, the UK’s Worldfirst, and Thailand’s Truemoney.
• The company still plans to invest abroad, reserving around 10% of the $34.4 billion it hopes to raise in its IPO for overseas investments.
• A person familiar with the matter told Reuters that Ant plans to provide initial support to the overseas e-wallet firms it invests in and then hopes to see them succeeed by themselves.

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I love lurking on Linkedin. A couple of weeks ago, something struck me. While Tiktok was facing the prospect of a US ban under an Aug. 7 executive order, many people in my European networks were delighted to announce that they were joining the short video company. Countless emojis were harmed in the making of these Linkedin posts. 

As its future in the US is under threat, Tiktok appears to be trying to fortify its operations in Europe. On Tiktok’s careers site, 272 jobs are posted in Europe (excluding Russia) at the time of writing. Dublin takes the lead with 117 jobs, London comes second with 78, and Germany third with a total of 34. Germany is hiring for offices in  Berlin, Munich, and Hamburg. Positions in Madrid, Paris, Stockholm, Warsaw, and Milan are also seeking candidates.

In Europe, Tiktok’s hiring patterns reflect its growing ambitions on the continent and a push to localize and clear the bloc’s data security hurdles. 

A data sweep on Twitter conducted by TechNode indicates that Tiktok has ramped up its hiring in Europe. Bytedance employees and job advertising services including the UK’s Job Centre Plus, a state-run employment platform, have mentioned jobs at Tiktok more frequently in recent months.

In August, 42 links to the Tiktok global careers website were posted on Twitter, compared to 12 in February. 

“It’s quite incredible how many people they’re bringing on board. Every week there’s new people,” a new hire who joined Tiktok’s European operations in August told TechNode.

Open positions on the company’s website include a wide variety of roles, from advertising and brand strategists to privacy specialists. Tiktok appears intent on localization, seeking fluent speakers in most European languages, such as Swedish, Hungarian, and Greek.

“Of course everybody is looking at what’s happening in the US,” the recent hire said, “but there’s no anxiety. On the contrary, everyone is very optimistic.”

Despite the ongoing row with Washington, Tiktok hasn’t taken down its job listings in the US. Currently, 465 positions are listed as available in the US on the app’s website. 

READ MORE: China tech faces double compliance challenge in Europe

Bet on Europe

Bytedance’s continued hiring for the popular video app shows it is optimistic about the European market, despite criticism over its privacy policy. Regulators have expressed concern over personal data flowing from the EU to China, the app’s handling of minors’ data and consent. But as long as Tiktok complies with local data regulations, the company should be safe in Europe, experts told TechNode.

Tiktok currently has over 1,600 employees based in Europe, roughly 1,300 of whom are based in the UK and Ireland, the company said in a statement Monday.

A Europe-wide ban is “unlikely,” said Jan Stryjak, Associate Research Director at Counterpoint Research. “Tiktok has not faced the same levels of scrutiny and political grandstanding in Europe as in the US,” he said, so it makes sense that it “looks to establish itself to build on its rapid growth in the region.” 

In Europe, regulators have tried to appear neutral. “I am not in the business of banning any company, I am in the business of explaining very clearly what are our rules,” EU Commission Internal Market Commissioner Thierry Bretton told Politico earlier this month.

“In the short-term, I wouldn’t expect any comparable moves on Tiktok in Europe to match US actions,” Andrew Small, associate senior policy fellow at think tank European Council on Foreign Relations, told TechNode.

By contrast, the situation around Huawei includes “fundamental questions” about the company’s role in Europe’s digital infrastructure and “longstanding issues about Chinese subsidies undermining European telecoms firms,” he said.

Tiktok does not provoke the same sensitivities. “The issues at stake with Tiktok relate to censorship and data use, neither of which is likely to lead to an outright ban, and there will be no inherent objection to Tiktok hiring and investing in Europe either,” said Small.

Beefing up data security

New data privacy and security rules in the European bloc are compelling Tiktok to reconfigure its global operations.

Bretton stressed that the “key subject” when it comes to Tiktok operating within the bloc is data, highlighting the rigor of Europe’s data security and privacy rules in comparison to China.

“The EU has not had to deal with this issue on a really major scale given that Chinese apps have not made many inroads with European consumers,” Small said. 

In August, the European Court of Justice ruled that personal data collected on EU citizens can only be transferred to third countries that have similar privacy regimes. The decision, known as Schrems II, could mean that personal data collected by Tiktok on European citizens can never be legally transferred to China. 

A few weeks after the ruling, Tiktok said its Irish and UK entities will be taking over data management for European users from its US operations. Shortly after, the company announced plans for a new data center in Dublin. According to company statements, the data center will form part of a “Privacy and Safety Hub” for Europe, the Middle East, and Africa.

Bytedance said it plans to spend €420 million ($500 million) on the Dublin data center. The investment will “create hundreds of jobs” in the city, said Roland Cloutier, Tiktok’s Global Chief Information Security Officer in a blog post.

Cloutier previously worked at Automatic Data Processing, a Nasdaq-listed HR systems provider, as well as US computer manufacturer Dell. 

The job listings on Tiktok’s website appear to line up with this announcement. Dublin is the city with the most job openings. 

But the Dublin data center doesn’t mean that Tiktok can put the data security issue to bed. 

The EU is known for having some of the world’s most stringent personal data protection rules, known as the General Data Protection Regulation (GDPR).

In June, the European Data Protection Board, an EU body in charge of the application of the GDPR, set up a task force to probe Tiktok’s data processing activities and privacy practices across the EU, China’s Caixin reported.

Privacy watchdogs in France and the Netherlands have also launched inquiries into Tiktok’s privacy policies, especially as they pertain to Tiktok’s underage users. 

Tiktok has not replied to a Sept. 15 email seeking comment. 

London calling, Berlin texting

Tiktok’s job listings show that politics have not dented its ambitions to be a true multinational. The company is charging ahead with establishing regional hubs and localization teams in key European cities, all answering to a CEO currently based in California.  

London ranks second among European cities in active jobs listings on Tiktok’s careers website. The short video app operator is reportedly considering moving its headquarters from Beijing to London, British media reported in August. 

“A new global headquarters in London could be a huge boon for the UK’s job market, which has suffered in recent months due to the Covid-19 pandemic,” Stryjak said. 

UK Prime Minister Boris Johnson will welcome the Tiktok headquarters with open arms, risking the wrath of US President Donald Trump, UK media has reported. 

The British government is reportedly split over the potential Tiktok move. Trade and tech officials and ministers are at odds over how to handle the Chinese tech company, the Telegraph reported citing UK government sources familiar with the matter.

Germany, which ranks third in the number of listed job openings, represents a big market with a big pool of tech talent, experts told TechNode. 

It’s also a strategic location that Tiktok can use to “buy some goodwill, given its outsized influence over the European debate,” Small said. 

Joining the whirlwind

Yet those who decide to join the company in these times are taking on a lot of uncertainty. The app’s US and EU operations were nearly sold to Microsoft after pressure from the US government. After weeks of speculation about a deal with Microsoft, the company has reportedly settled on a partnership with Oracle instead. 

TechNode found two people who have been approached by recruiters. Both said they ignored the recruiters’ messages as they were not interested in working for the short video app. “Tiktok is stupid,” one of them said.

But Linkedin job updates indicate that Tiktok’s attempts to poach top tech talent have been successful at times. 

Many of the new hires came from some of the West’s biggest companies, including big tech. The person who onboarded recently said the salary offer was “very competitive” but didn’t give any further details. But “it wasn’t like I couldn’t trust my eyes,” they said.  

Another new hire said that they were under a non-disclosure agreement that is valid for 100 days after onboarding. 

In a Linkedin search, TechNode identified one person who worked at Amazon for seven years in Germany and recently said they joined the Bytedance app in September. A UK-based professional with four years of experience at Google and three years of experience at Netflix said they took a position at Tiktok in July. Another person who was at Google for two years also said they joined the app in September. 

The European who is considering a position said that working for the Chinese company in the midst of an international storm seemed “insane” at first, but that they have come to appreciate the challenge.

The recent hire said that Tiktok is “an exciting place to work in at the moment, regardless of how safe this job is in the long term. 

“We all know that this industry is moving very fast. But it’s really interesting to be part of this and get this experience at this time,” they said.

China tech in Africa is nothing new. Telecommunications giant Huawei has built around 70% of the continent’s 4G networks. Smartphone manufacturer Transsion commands 40% of Africa’s smartphone market. 

Over the past few months, TechNode has been mapping Chinese tech giants overseas empires. Initially focused on the US, Chinese companies have since 2018 slowed down investing in the country, as tensions between the two superpowers rise. As we’ve written previously, companies including Alibaba and Tencent have instead sharpened their focus on the developing markets of India and Southeast Asia. 

Africa is no different. Lifestyle services giant Meituan-Dianping, gaming behemoths Tencent and Netease, as well as Transsion have made big bets on African companies. Alibaba has taken a different approach by launching training programs for aspiring African entrepreneurs.

Meanwhile, big-ticket Chinese venture capital firms including IDG Capital, Sequoia China, and Gaorong Capital have sharpened their focus on Africa. Investors expect to see a boom in financial services on the continent as connectivity improves and under-served populations come online. 

Africa is a huge market with massive potential. The continent boasts six of the world’s ten fastest-growing economies. With a diverse mix of 1.3 billion people, its population is expected to surpass China’s by 2025. 

To be sure, China tech’s footprint remains modest in Africa, but the trends point to a major shift. Chinese tech titans see opportunities and conditions similar to those that lifted themselves in China before the internet boom. 

Humble beginnings

Like China in the early 2000s, Africa supports a massive population, an under-served market, and a growing pool of tech talent. As the demand for digital services has increased, dynamic tech hubs have sprung up in Nigeria, Egypt, Kenya, and South Africa. 

In the past decade, some Chinese companies have seen massive success in Africa. While the US has pushed countries around the world to exclude Huawei from their telecommunications networks, African countries have welcomed the firm as they push to improve connectivity. 

Huawei was instrumental in rolling out 4G rollout across Africa and is set to drive 5G adoption on the continent. Alongside Chinese rival ZTE, Huawei received preferential loans from the Chinese government to establish telecom infrastructure throughout Africa, found Iginio Gagliardone, a professor at the University of the Witwatersrand who has written extensively about the influence of China in Africa. The government loans enabled the two companies to expand their influence across the continent with little risk.

A few other firms bet the farm on Africa, like Transsion. Founded in Shenzhen, the phone maker’s primary markets are all in Africa. The company controlled more than 40% of the African smartphone market at the end of last year, according to the International Data Corporation (IDC). Transsion also holds nearly 70% of the feature phone market, IDC data shows. The company, which operates R&D centers in Nigeria and Kenya, went public on the Shanghai Stock Exchange’s Nasdaq-like Star Market last year. 

Driven largely by the Chinese government, Chinese investments in Africa have historically focused on infrastructure projects. Chinese foreign direct investment in Africa reached $5.4 billion in 2018, up 30% from the year before, according to data from the China Africa Research Initiative at John Hopkins University’s School of Advanced International Studies. 

But things began to change that year. At the Forum on China-Africa Cooperation (FOCAC) in September 2018, Chinese President Xi Jinping encouraged Chinese companies to invest $10 billion in Africa over the following three years, pronouncing an important shift from public to private investment in Africa. 

“China has demonstrated its readiness to invest in areas deemed by foreign investors and donors as too risky, not sufficiently profitable, or not high priorities in the aid agenda,” Gagliardone wrote in his book “China, Africa, and the Future of the Internet.” 

Since 2018, Chinese companies have sharpened their focus on the continent, and 2019 saw record amounts of Chinese involvement in the continent’s tech sector. 

Increased presence

Alibaba began its Africa expansion in 2017—the year founder Jack Ma made his first visit. The company believes that its experience in China prepares it to develop Africa. ”I found myself propelled twenty years back in time, to the time when Alibaba was founded,” Ma said after the trip. 

During the visit, Ma launched a $10 million fund for young Africa entrepreneurs to bring their offline businesses online and pledged to take 200 young business people to China to learn from Alibaba. 

He returned a year later when Rwanda became the first country to join Alibaba’s Electronic World Trade Platform (eWTP), which promises to make cross-border trade easier for small to medium enterprises. 

Chilli and coffee farmers in Rwanda have used the platform to sell their products on Tmall, Alibaba’s business-to-consumer marketplace, while Ethiopia became the second African country to sign eWTP agreements late last year. It remains unclear how many companies are benefiting from the initiative.

Meanwhile, other tech giants have also increased their focus on Africa. In early 2019, Chinese smartphone giant Xiaomi set up a business group to grab at sales on the continent in order to offset slowing growth at home. The move put Xiaomi at odds with well-established Chinese rivals rival Transsion and Huawei, which claimed a market share of nearly 10%. 

Transsion had been able to avoid fierce competition from domestic rivals in its home market by focusing on Africa, but those companies were now also looking abroad for new sources of growth. 

In 2015 Transsion launched music-streaming service Boomplay through a joint venture with Chinese gaming giant Netease. The service is primarily focused on the African market: 85% of its users come from Nigeria, Ghana, Kenya, and Tanzania.

The company launched the service to make its phones more attractive to buyers and to boost revenue from non-hardware sales. The initiative has so far been a success. In April last year, Boomplay raised $20 million from Chinese investors including Maison Capital and Seas Capital. 

Fintech focus

Complementing the spread of China tech in Africa, Chinese investors have also increasingly sought out startups across Africa. These investors are looking to place their bets on Africans without bank accounts.

African startups raised a total of $2 billion in 2019, more than 70% than the year before, according to data from global investment firm Partech. While Chinese investments comprised only a small portion of that total, Africa has received a major boost in attention from Chinese investors. 

Fintech services developed early in Africa. Ten years ago, fintech platforms in Africa were more developed than those in China, prior to the launch of Ant Group’s Alipay or Wechat’s Wechat Pay. “Mobile money,” which allows people to make payments, and deposit or withdraw money on even the most basic mobile phones, gained widespread adoption.

In 2017, Chinese-owned, Norway-based software company Opera pledged to invest $100 million in Africa’s digital economy. The company later launched super app Opay in Nigeria, which combined payments, food delivery, and ride-hailing services. 

Opay was a handful of fintech beneficiaries from a boom in Chinese investment in Africa’s tech sector in 2019. The company closed two funding rounds last year, raising $170 million to help its expansion plans. Investors included some of the biggest Chinese names: Meituan, Gaorong Capital, Sequoia China, and IDG Capital. 

“Opay will facilitate the people in Nigeria, Ghana, South Africa, Kenya, and other African countries with the best fintech ecosystem that Africa has ever seen,” Zhou Yahui, CEO of Opay and founder of Kunlun, said in a statement at the time. 

But due to the Covid-19 pandemic, the company announced in July that it was suspending its non-fintech operations, including ride-hailing and food delivery service 

Meanwhile, Africa-focused fintech platform Palmpay launched in Nigeria after a $40 million investment from Transsion and Netease. The investment also included a partnership with Transsion to pre-install the Palmpay app on 20 million of Transsion’s phones this year. 

The focus on investing in fintech is driven by a broad-based effort to bring financial services to Africa’s unbanked. According to the World Bank, nearly two-thirds of sub-Saharan Africans do not have bank accounts. In 2019, fintech received the most venture funding out of any industry in Africa, according to Weetracker. 

Ant Group has taken notice of Africa’s fintech revolution. Last year the company partnered with Silicon Valley- and Lagos-based startup Flutterwave to add Alipay as a payment method for Flutterwave’s 60,000 merchants. 

In July, Ant Group partnered with South Africa mobile operator Vodacom to launch a payments app in the country. The two companies aim to tap the 11 million South Africans who don’t own bank accounts. 

Driving digital services

Africa represents an opportunity that Chinese tech firms caught onto early, and show no signs of paring back. Many of these same Chinese firms thrived after the internet boom in China and stand to leverage their knowledge to help spread digital products across Africa. 

As the digital divide on the continent narrows, more people in Africa will adopt these services, and like in India and Southeast Asia, Chinese companies and investors won’t want to miss out. Their current push onto the continent is likely only the beginning. 

Despite what you may have heard, bike rental is not dead.

The great Chinese bike sharing bubble popped a long time ago. Like a horde of syphilitic conquistadors, some 80 startups (including two unicorns) charged into the jungle in search of a city of bike-share gold, challenging the dominance of the car and bringing mobs of bikes back to China’s major cities. Few ever emerged, and those that did are mostly known by new names.

They got greedy, fighting price wars and spending user deposits on operations, and it brought them down. Ofo, of the yellow bikes, collapsed in a blaze of lost deposits, with CEO Dai Wei placed on a consumption blacklist that prevented him from traveling by train or buying cars. The next two players, Mobike (in orange) and Bluegogo (blue), exited with sales to tech giants Meituan and Didi Chuxing. 

But under the wing of deep-pocketed giants, share biking is very much alive. It’s not the Wild West anymore—the sidewalk-blocking piles of bikes are rare, prices are a little higher, and there are rules about parking—but in a major city there’s almost always a bike available. Could this be—wonders—a sustainable industry?

Bottom line: No one ever found El Dorado, but it looks like bike rental is close to breaking even. The three remaining dominant players—Ant Group-backed Hellobike, ride-hailing service Didi’s Qingju, and lifestyle services giant Meituan’s Meituan Bike—have survived the bust by raising prices and looking for ways to develop sustainable businesses.

• These companies have replaced unbridled hyperscaling with a focus on profit. 
• Previously cautious investors appear to have picked up on these signals, and signs are emerging that the bike rental’s capital winter is beginning to thaw. 

What went wrong

It was 2016, and bike rental was booming. Startups piled into the market, and by the end of the year, nearly 30 companies had set up shop. Investors followed, and almost overnight, millions of bicycles appeared on sidewalks across China. 

At its peak, 80 companies operated around China. In 2018 the industry was worth RMB 17.8 billion ($2.58 billion), up from RMB 1.2 billion in 2016, according to data from Equalocean. But the bubble popped as quickly as it grew.

• Bike rental companies soon found that putting more bikes on the street doesn’t mean more profit—quite the opposite.
• Underpriced rides, price wars, and mounting maintenance costs began to take their toll. Companies burned through investors’ cash, while stiff competition and a saturated market quickly led to consolidation. 

Consolidation begins: Mounting regulation and costs started to take a toll, and   companies began to drop like flies. Ofo, once the darling of the industry, saw its cash reserves dwindle amid mounting lawsuits and a run on deposits. 

• At the end of 2017, once-popular Bluegogo shut down. The company’s operations were quickly snapped up, in part by Didi.
• Others followed suit. Coolqi and Xiaoming Bike struggled to pay back their users’ deposits and disappeared. In the space of five months, six bike rental companies shut down across China.
• At the beginning of 2018, as Mobike reeled from the fallout of increased regulations and the price war, lifestyle services giant Meituan swept in to acquire the company for $2.7 billion. 

‘Bike rental 3.0’

Now, just three companies dominate the sector—Hellobike, Didi’s Qingju (or Orange), and Meituan Bike. 

Two of the three—Qingju and Meituan Bike—are run by companies with deep pockets. Hellobike is backed by Ant Group, the world’s largest fintech company. Their focus has shifted from hyperscaling to profitability.

New business models, new bikes

Gen 1.0

Gen 2.0

Gen 3.0

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• While Mobike and Ofo sought to scale rapidly across the globe, the surviving bike rental trifecta has narrowed in on the Chinese market. 
• The days of cash-burning subsidy wars have come to an end and an era of increased prices has begun. 
• Hellobike, Meituan, and Didi have all raised their prices. Hellobike is the most expensive at RMB 4.50 an hour, while Meituan Bike and Qingju Bike cost RMB 3 for the length of a ride. Companies charge in either 15-minute or 30-minute intervals. Prices vary across cities in China
• Companies are focusing on user retention rather than growth. They’ve attempted to improve user stickiness by offering discounted longer-term bundles.
• The build quality of the bikes has also improved, a far cry from the Ofo days. Ofo users used to complain that their bikes broke easily and were frequently in poor repair.

Attempts at profit: For the first time in the industry’s history, companies are talking seriously about bike rental turning a profit. Hellobike, China’s biggest bike-rental firm, said in September (in Chinese) last year that it was profitable in 200 cities across China. The company claimed 400 million cumulative registrations as of July. 

• Meanwhile, Meituan has managed to narrow its losses but is still unprofitable. 
• Amid the Covid-19 pandemic, Meituan saw losses from its bike rental business decrease dramatically year on year amid the pandemic. Second-quarter costs from its bike-rental division fell by RMB 1 billion compared to the same period in 2019, mainly due to a “significant decrease in depreciation of bikes.”
• It is unclear whether Didi, which is unlisted and not required to disclose its financials, has been able to break even in bike rental. 
• Nevertheless, talk of profit is a stark contrast to Ofo and Mobike. According to Dongxing Securities, the two companies’ blind pursuit of scale meant they burned through cash faster than they could raise it from investors. Today’s bike rental trifecta is at least trying to avoid this mistake. 
• The industry saw a significant spike in China as it locked down to prevent the spread of Covid-19. Hellobike saw its trips double nationwide in the few days after Wuhan, the city at the centre of China’s outbreak, was cut off from the rest of the country. Meanwhile, Didi’s Qingju Bike saw usage increase by 150% between the beginning of February and the beginning of March. 

Varying approaches: Platforms have sought novel ways to eke out profits and reduce losses. Hellobike, Meituan, and Qingju charge riders who park bicycles in unpopular places extra to reduce the costs of collecting them. A slew of other fees also exist, including for bikes parked outside designated parking areas. 

• Hellobike survived the great cull by taking a different approach to other bike rental platforms, initially focusing on lower-tier cities where public transport systems aren’t as well developed. Now, the company has dominated the markets in these cities and is expanding to challenge Meituan and Didi in China’s first-tier cities. 
• In June 2019, Didi created a two-wheel business department, merging its bicycle and e-bike divisions. The move was aimed at increasing efficiency, while improving cooperation with local governments and bicycle suppliers, both key to the company’s ability to operate effectively. 
• Didi has taken the opposite geographic approach to Hellobike, with plans to expand to China’s lower-tier cities from a metropolitan base.

Appeasing the powers that be: With increasingly strict rules, navigating government regulations aimed at reducing bikes cluttering city walks has become increasingly important. 

• Cities around China have introduced rules to limit the number of bicycles on their streets and also to ensure bikes are parked in specified areas. Shanghai was one of the first cities to do so, and requires companies to be licensed in order to operate a bike rental platform in the city. 
• Bike rental companies have turned to technology to enforce these rules. Hellobike’s bicycles and e-bikes have since late June used the Beidou navigation system, China’s equivalent to GPS, in order to monitor where its bikes are located and where users park them. 
• Companies have also used other technologies like Bluetooth and RFID for the same purpose. 
• Companies are increasingly working with local governments, as opposed to butting heads with them, to create an integrated public transport system. Dubbed “Bike rental 3.0,” new emphasis is being put on these companies working more closely with local governments. 

Increased confidence: As surviving companies learn from the mistakes of their predecessors, confidence among investors has shown signs of rebounding. In April, Didi’s Qingju reportedly raised a whopping $1 billion from Lenovo-backed investment firm Legend Capital and an unnamed international venture capital firm. 

• During the same month, Hellobike raised $200 million from Shenzhen-listed electric product maker Hangzhou Zhongheng Electric to build charging stations for electric bikes. 
• In December 2018, Hellobike raised RMB 4 billion in a round led by Ant Financial. 

China’s bike rental saga is a familiar story. A new field opens up, pundits declare it to be the future, dozens of startups start and investors overheat the sector. Pretty soon, the fire runs out of oxygen and burns out. Finally, tech giants step in to create something modest and sustainable from the ashes. 

Revenue for Chinese search giant Baidu contracted 1% in the second quarter compared with the same year-ago period, with the company warning that the downward trend could continue in the second half of 2020.

Why it matters: Baidu narrowed a revenue decline from the first quarter, showing some signs of recovery after the Covid-19 outbreak in China.

• Nevertheless, the company’s ad sales, a major contributor to overall revenue, took a significant hit as companies in China have tightened their belts in the aftermath of Covid-19.

Details: Baidu’s revenue reached RMB 26.03 billion ($3.69 billion) in the quarter ended June 30, down 1% from the RMB 26.33 billion it earned during the same period in 2019, the company announced on Thursday. Baidu previously forecasted sales of between RMB 25 billion and RMB 27.3 billion in Q2.

• Revenue from online marketing was RMB 17.7 billion, falling 8% year on year, as Chinese companies weather the fallout from the Covid-19 outbreak and competition from rivals including Bytedance and Tencent increases.
• Baidu managed to narrow a decline in its revenue in the first quarter, which fell 7% year on year to RMB 22.55 billion.
• Net income reached RMB 3.6 billion, up 48% year on year, slowing from 62% annual growth it saw in Q2 2019.
• The company warned that a decline in overall sales could continue in the second half of the year. During the third quarter of 2020, Baidu expects revenues fall between RMB 26.3 billion and RMB 28.7 billion, representing a 6% year-on-year decline or 2% growth as a result of the “very limited” business visibility in China as a result of the Covid-19 pandemic.

Context: Baidu has plowed billions into diversifying its offerings in search of additional revenue streams. It has focused this spending on artificial intelligence and cloud computing, while the company is exploring enterprise services for growth.

• Nevertheless, a number of these investments, most notably its bet on autonomous driving, have yet to pay off. It’s unlikely the company’s self-driving car project will see significant returns in the next decade, putting additional pressure on its other businesses.

It wasn’t so long ago that China tech investment loved US startups. Now, the two tech markets feel like they’re on different planets.

So far, the American offensive specifically targets two companies, but ripple effects are creating uncertainty over just how wide-ranging the ban could be—especially for Wechat’s owner Tencent, which holds a formidable portfolio of US investments.

So how do geopolitical tensions affect Chinese tech’s overseas investments? Pretty significantly, it turns out. In fact, the story of American measures to stifle Chinese influence in its home market starts long before July.

I scraped and analyzed public funding data to pinpoint deals by Chinese tech majors in the US. The numbers highlight a turning point in 2018, when the US sharpened its focus on companies like telecommunications giants Huawei and ZTE. Since then, Chinese investments in US startups have fallen off a cliff. 

Tech giants like Alibaba, Tencent, and Baidu appear to have reversed their US investment strategies amid rising tensions between China and the US, as two superpowers tussle over the future of the companies that dominate the internet. 

Key takeaways:

• Chinese tech giants invested heavily in the US between 2010 and 2018, but quickly scaled back investments in US startups beginning in 2019. 
• The drop-off is partly explained by increased scrutiny in 2018, when the Committee on Foreign Investments in the United States (CFIUS) was given more power to review investments in US companies. 
• Since then, new Chinese investments in American startups have fallen dramatically. Contributions in the first quarter of 2020 dropped to $400 million, down by more than a third compared to the same period in 2019, according to the US-China Investment Project.
• The drop in funding occurred only among Chinese investors—overall investment flows into US startups largely remained the same in 2019.

Investment explosion

It started with a boom. After gaining a solid foothold in their home markets, Chinese tech giants started looking abroad for the next big thing. 

In 2008, Tencent became the first Chinese tech giant to set its sights on the US, investing in big-ticket companies like electric vehicle maker Tesla and social media giant Snap. 

The company has participated in 81 funding rounds for US startups since 2008. Its US investments peaked between 2014 and 2017, a period when it made three-quarters of its deals—62 in all. 

In 2010, the same year that Google bowed out of China over concerns of censorship and cyber threats, e-commerce giant Alibaba made its first move into the US. The e-commerce giant has since taken part in 27 funding rounds for US companies. These rounds totaled more than $5.4 billion. Given how companies guard information about their investments, the data presents only the total value of each funding round rather than Alibaba’s individual contributions.

Meanwhile, Baidu made its first US investment in 2013. Though it has taken part in significantly fewer funding rounds than either Alibaba or Tencent, Baidu’s investment peak came in 2016, when it participated in rounds for lidar-maker Velodyne, as well as fintech companies Circle and Zestfinance. 

Overall, Chinese venture funding in the US amounted to around $14 billion between 2013 and 2018, according to figures from the US-China Investment Project. Total investment spiked in 2018 at $4.7 billion, but otherwise plateaued between 2015 and 2019 at around $2.5 billion. 

The bust

Everything changed after 2018. In 2016, Baidu, Alibaba, and Tencent were involved in 22 deals in the US. In 2019, they took part in a paltry three investments.

The reason was almost certainly politics. As trade tensions between the world’s two largest economies flared, the US and Chinese tech sectors took most of the heat. Hostility grew and investments shrank.

Chinese investors that focused on US startups in previous years have sought distance from the sector. Tightening US regulations drove them away, while the prospect of bigger returns lured them to developing markets. New rules that give CFIUS extra power added another important reason for the decline.

In 2019, Tencent took part in just two funding rounds—one for social media news aggregator Reddit, and another for contacts manager Contacts+—a 90% decrease from its height of 23 deals in 2015, and a 70% year-on-year decline from 2018. 

While Alibaba’s US portfolio isn’t as expansive as Tencent’s, the company participated in 26 deals between 2010 and 2017, including high-profile investments into companies like mobility platform Lyft and Snap. Since 2018, it has taken part in only one US funding round.

Alibaba’s pullback from the US preceded Tencent’s. Business concerns may have also played a role, as the company pivoted to Asia’s lucrative developing markets when growth began to stagnate in its home market of China. Still, US scrutiny of Chinese firms was already intensifying, and rising tensions undoubtedly played a role in Alibaba shifting away. 

Even Baidu, which has far less at stake in the US given its smaller investment footprint, has pulled back from American investments. Just one of its 11 investments took place after 2018. 

As the number of Chinese funding rounds in the US declines, so does the amount of investment coming from China. The US-China Investment Project estimates that Chinese venture funding in the US totaled $400 million in the first quarter, down from $640 million during the same period in 2019 and $1 billion in 2018. Of course, a global pandemic beginning in China also contributed to this fall.

This dropoff was “distinctively Chinese,” according to the US-China Investment Project’s report. Despite the decrease in Chinese investment, overall funding in US startups largely remained the same. 

China’s tech giants have turned their eye to the developing markets. Firms including Alibaba and Tencent have increased their investments in the emerging markets of South and Southeast Asia. The two companies have divided up India’s tech scene without any overlap in their investments, while also making some big bets on promising tech companies in Southeast Asia. 

Tougher reviews

A significant factor contributing to the dropoff in China tech investment is the increasingly strict regulatory environment. In late 2018, the US introduced new measures that increase scrutiny of foreign investments in American companies. 

Dubbed the Foreign Investment Risk Review Modernization Act (FIRRMA), the changes gave CFIUS, an inter-agency body tasked with identifying risks from foreign investments, more power to scrutinize investments into American firms. 

FIRRMA came into effect amid fears that Chinese acquisitions of and investments into US companies were abetting technology transfers from the US to China, and having adverse effects on American companies and internet users.

Before the new rules, CFIUS typically reviewed deals only when a foreign investor took a controlling stake in a US company, focusing on deals involving sensitive technologies.

In early 2018, fintech giant Ant Financial found itself locking horns with CFIUS. The Alibaba-affiliated company had wanted to acquire American money transfer firm Moneygram, but was forced to withdraw from the deal after the regulatory committee rejected it over national security concerns. 

The proposed $1.2 billion deal would have made 2018 an even bigger year for China-US investment flows, increasing total investment that year to nearly $6 billion, based on figures from the US-China Investment Project. That figure would have more than doubled the previous year’s total. 

CFIUS has also blocked Chinese ownership of the LGBTQ dating app Grindr. The committee required Beijing Kunlun Technology, the app’s previous owner, to sell the app, citing national security concerns. Kunlun agreed to sell the app to San Vincente Acquisition in March. 

FIRRMA gave CFIUS a mandate to review non-controlling investments in US companies that produce critical technology, critical infrastructure, or that collect US citizens’ personal data. Critical technologies can include anything from semiconductors to batteries. 

Crucially, it also authorized the committee to target investors based on the country they are from. 

“While specific countries are not singled out, FIRRMA allows CFIUS to potentially discriminate among foreign investors by country of origin in reviewing certain investment transactions,” the Congressional Research Service, a US Congress-affiliated think tank, wrote in a February report.

According to CFIUS’ annual report, only three potential investments in critical technology originated from China in 2019. But even if CFIUS is not rejecting deals, the dramatic drop in Chinese investment shows that Chinese tech companies don’t think it’s worth trying.

“The broad impacts suggest systemic headwinds to Chinese venture activity, reflecting tighter investment screening and a deterioration in investor sentiment as US-China tensions increase,” said the report by the US-China Investment Project. 

Given the Trump administration’s latest move to shed Chinese technology from America’s digital networks, Chinese companies and investors will likely continue to be driven away by US politics.

Electric vehicle (EV) startup Xpeng has raised an additional $300 million as part of the company’s Series C+, bringing the total amount raised in the round to $800 million.

Why it matters: The deal reflects growing optimism in China’s electric vehicle market after a disappointing second half of 2019. Sales of electric cars plummeted after China’s government cut purchase subsidies by around 50% in mid-2019.

• The industry also took a significant hit in the first quarter of 2020 as a result of the Covid-19 outbreak in China. Just 11,000 new energy vehicles were sold in February, down from 137,000 in December, according to figures from the China Passenger Car Association.

Details: Based in the southern Chinese city of Guangzhou, Xpeng is raising an additional $300 million from new investors including the Qatar Investment Authority, the Middle Eastern nation’s sovereign wealth fund, Reuters reported, citing sources. E-commerce giant Alibaba also contributed to the expanded fundraising, according to CNBC.

• Earlier this month, Xpeng announced its $500 million Series C+, with backing from equity investment firm Aspex Management, US tech hedge fund Coatue Management, global private equity firm Hillhouse Capital, and Sequoia Capital China.
• The company may expand the latest fundraising further, sources told Reuters.
• An Xpeng spokesperson declined to comment on the expanded fundraising when reached by TechNode on Monday afternoon.
• With the addition of the new investors, Xpeng’s Series C is now worth $800 million.
• Xpeng is reportedly also pursuing a US IPO after confidentially filing in June, Chinese media reported.

Context: US EV maker Tesla has boosted investor sentiment in China’s EV sector, as a result of the company’s strong deliveries and an expected surge in profits.

• On July 30, rival EV maker Li Auto went public on the Nasdaq. The company priced at $11.50 prior to its IPO, higher than its expected range of $8 to $10. The company closed up 43% at the end of its first day of trading.
• Xpeng raised $400 million in Series C funding late last year, bringing in new investor Xiaomi.

Electric vehicle maker Li Auto raised $1.1 billion in its Nasdaq debut on Thursday after pricing above its expected range, becoming the second Chinese new energy vehicle company to list on an American bourse. The company’s share price closed up more than 40% after its first day of trading.

Why it matters: Winners are beginning to emerge in China’s electric vehicle market after a boom in the industry. Several automakers including rival startup Byton have failed to raise funds to hold them over in the aftermath of the Covid-19 outbreak.

• Meanwhile, Tesla challenger Nio has seen its share price surge after it secured lines of credit from several Chinese banks amounting to RMB 10.4 billion ($1.48 billion).
• Li Auto reached 10,000 deliveries faster than any of its more established rivals.
• The company’s IPO could serve as a litmus test for interest in Chinese companies going public in the US.

Details: Li Auto began trading under the ticker “LI” on Thursday. The company priced 95 million American Depositary Shares at $11.5 per share, higher than the expected range of $8 to $10.

• Goldman Sachs, Morgan Stanley, UBS, and China International Capital Corporation were underwriters on the listing.
• The company also raised an additional $380 million through a concurrent private placement to existing investors including affiliates of lifestyle services company Meituan and short video giant Bytedance.
• Li Auto’s CEO and founder Li Xiang currently holds a 25.1% stake in the company. Meituan CEO Wang Xing follows with a 23.5% stake. Li retains more than 70% of the voting power after the listing, according to the company’s IPO prospectus.

Context: US listings are proving to be popular among Chinese EV makers despite increasing scrutiny of Chinese companies in the US. Nio went public in New York in late 2018 while rival EV maker Xpeng is reportedly also pursuing a US IPO after confidentially filing in June, Chinese media reported.

• Meanwhile, WM Motors is weighing up a listing on Shanghai’s Nasdaq-like STAR Market, Bloomberg reported.
• It has been a difficult year for electric vehicle makers, which last year saw a drastic decline in deliveries after the Chinese government reduced purchase subsidies by around 50%.
• The industry also took a big hit in the first quarter in the aftermath of the Covid-19 outbreak in China, with sales of new energy vehicles dropping to 11,000 in February from 137,000 in December, according to figures from the China Passenger Car Association.
• Li Auto, formerly known as Lixiang, was founded in by Li Xiang in 2015. The company closed its $550 million Series D this month. The round was led by lifestyle services giant Meituan, the EV company’s largest backer.

The head of AI research at Bytedance is leaving the company as the tech giant faces intensifying international scrutiny of its popular short video app Tiktok, Reuters reported.

Why it matters: Bytedance has seen a slew of setbacks in its international operations as countries including the US and India look to limit its presence within their borders.

• The company recently hired former Disney executive Kevin Mayer as Tiktok’s chief executive officer in a bid to assuage concerns over the company’s Chinese ownership.
• China has ambitions to become the world’s forerunner in AI technologies, but it battles to retain its AI talent, according to report by US think tank Macro Polo.

Details: Ma Wei-Ying will leave Bytedance this week, Reuters cited a source as saying. A replacement has not yet been made public.

• The AI researcher joined Bytedance in 2017 after leaving Microsoft Research Asia, becoming its vice president and head of the company’s AI lab.
• Ma was trained in Taiwan and the US, and received a doctorate in electrical and computer engineering from the University of California, Santa Barbara in 1997, according to his Linkedin profile.

Context: Bytedance is facing heightened pressure after the app was banned in India—the company’s largest international market—in late June and faces the possibility of similar measures in the US.

• Tiktok was one of 59 Chinese apps banned in India over national security concerns. Previously, the app was pulled from app stores in the country after a state court found that it was used to spread pornography and encouraged predatory behavior.
• In the US, two federal agencies are investigating whether the app breached a deal it made in 2019 to protect children’s rights.

As Chinese tech companies push abroad, India has been a land of opportunity. But rising tensions between the two countries are starting to raise questions about the future of Chinese tech in India.

In the past five years, firms including short-video giant Bytedance, e-commerce firm Alibaba, social media behemoth Tencent, and smartphone maker Xiaomi have participated in funding rounds for Indian startups totaling more than $12.3 billion, according to my analysis of public data. These investments have helped to scale Indian unicorns like Paytm, Snapdeal, Swiggy, and Ola.

Now, however, these Chinese companies could be caught in the crossfire of a geopolitical battle. On June 29, Indian officials banned 59 Chinese apps over national security concerns—including apps made by companies that have been investing millions in the country’s startups.

India’s technology minister referred to the move as a “digital strike” against China. The ban came just two weeks after a deadly border clash between the two nations that left 20 Indian soldiers dead.

What is at stake for Chinese tech companies in India? This month, I’ve delved into the data to explore how intertwined India’s tech sector is with China’s. What has emerged is a story of a China tech proxy war, and investments that may come back to bite China’s biggest tech companies. Here’s what I found:

• Two companies—Alibaba and Tencent—dominate Chinese investment in India. Both are vying for a piece of India’s biggest tech companies.
• None of those companies have investment from both Chinese tech giants, dividing India’s tech sector into startups that are Tencent-invested and those that won investment from Alibaba.
• In the last five years, Chinese firms accounted for 11.6% of total funding to Indian startups, according to Mumbai-based think tank Gateway House, with 96% of this money being associated with Alibaba and Tencent.
• Several other companies, including Bytedance and Xiaomi, have also backed Indian startups, but to a lesser degree.
• The future of Chinese investment now looks uncertain as a result of rising political tensions between China and India.

Surging funds

China’s investment in Indian startups has swelled in the past four years.

The reason is due in part to rising suspicion of Chinese capital in the US, traditionally a popular destination for these companies. As American startups became a less-popular proposition, Chinese tech firms looked instead to Asia’s emerging markets.

Now, India’s popularity comes with a price tag.

Apps produced by Bytedance, Alibaba, Tencent, and Xiaomi were among those banned by India’s government at the end of June.

Bytedance’s massively popular short-video platform TikTok and its India-focused social media platform Helo have been blacklisted. Meanwhile, around eight of Tencent’s apps have been banned, including the popular messaging app WeChat, which has more than a billion users around the world, and seven QQ apps, including QQ Music and Wechat predecessor QQ messenger.

In addition, Alibaba’s popular UC Browser and UC News apps, as well as Xiaomi’s Mi Call app have been outlawed.

A tale of two companies

Five years ago, India looked like a safe place for a Chinese company to invest and earn profits. That’s when Alibaba made the first move into India.

In 2015, the company invested in the Indian startup payments Paytm through its fintech affiliate Ant Financial.

This wasn’t Alibaba’s first overseas investment. However, it did represent an important shift for the company, moving its focus away from investing in the US in favor of the developing markets of India and Southeast Asia—a strategy that now defines its approach to investing abroad.

Tencent followed suit later that year, becoming one of several investors to take part in a $90 million funding round for the medtech startup Practo.

Five years later, the two companies have become China’s biggest investors in India. Alibaba and Ant Financial have taken part in 20 funding rounds for Indian companies. The combined value of these deals exceeds $5 billion.

Meanwhile, Tencent has participated in rounds totaling a combined $6.7 billion in India. Of the nearly 180 international rounds in which Tencent has taken part, 24 were in India.

Chinese firms accounted for 11.6% of the total funding to Indian startups in the last five years, according to Gateway House. Tencent and Alibaba alone make up a significant portion of this total, according to my analysis. The value of the rounds that Tencent and Alibaba participated in make up 96% of the total value of all rounds in which Chinese tech giants have taken part in India.

Through these investments, the companies appear to be dividing up India’s fintech and e-commerce sectors. On one side are the Alibaba-affiliated companies: Bigbasket, Paytm, and Snapdeal. On the other side stand the Tencent-invested firms: Swiggy, Khatabook, and Flipcart.

Alibaba had initially focused its attention on smaller bets on companies in mature markets, but they changed tack in 2015. In India, the company has set its sights on well-established companies central to its core business, the majority of which were Series C or above at the time of investment. Its strategy has paid off. Five of its investments in India have reached unicorn status.

Tencent has pursued a different strategy. The social media giant has taken more of a shotgun approach, investing in a wide array of industries from content and entertainment to online travel to digital security.

Wider focus

Aside from Alibaba and Tencent, several other Chinese tech firms have pushed into the subcontinent by expanding their services to Indian users and investing in the country’s startups.

With perhaps the largest physical presence out of all the Chinese tech giants, Xiaomi has seen its India revenue surge. The company holds the largest share of India’s smartphone market: nearly 30% as of mid-2019.

In the third quarter of that year, the company reported that one-third of its revenue came from its India operations. The country is so important to Xiaomi that they even have an India-focused smartphone brand, Poco, which it spun off earlier this year.

Since the beginning of June, Xiaomi has even begun sporting a “Made in India” section on its Indian website, claiming that 99% of all the phones it sells in the country are made there. The move is part of a 2014 plan by the Indian government to incentivize manufacturing within the country.

Aside from its own products, Xiaomi has also invested in several Indian startups, participating in eight funding rounds worth a total of $78 million.

These investments have predominantly focused on early-stage companies offering mobility and content and entertainment services. Investments in digital services make sense in a country with a rapidly growing internet population. Xiaomi describes itself as an internet company despite the fact that the majority of its revenue is derived from hardware.

Xiaomi has predominantly focused on India, with just one US-based startup in its portfolio, while a third of all international funding rounds in which Bytedance has participated involve Indian companies.

Bytedance’s investments come as the company has pushed its own services—most notably TikTok—in India. The content giant has invested $67.5 million in Dailyhunt, an Indian news aggregator.

But it’s Bytedance’s own apps that make it a big deal in India. The country is TikTok’s biggest market, boasting around 200 million monthly users. Bytedance also operates the Indian social media platform Helo, which had nearly 50 million monthly users last July, according to the company.

Souring relations

Rising tensions between China and India are threatening to bury Chinese companies’ early success on the subcontinent—and any future investments—in an unexpected geopolitical earthquake. India is taking steps to limit Chinese foreign direct investment in the country over concerns that the companies are state-owned.

Apart from blocking Chinese companies’ apps, India amended its foreign direct investment (FDI) rules earlier this year. The amended rules require any company from a bordering nation to get permission from the government before investing in an Indian company. The rules had previously only applied to Pakistan and Bangladesh.

Changes to India’s FDI laws are likely to have a “detrimental effect” on India’s startup ecosystem, according to Aurojyoti Bose, lead analyst at Globaldata. “Chinese companies have traditionally been the lead investors in some of the key startups in India, which also enabled these startups to scale up,” said Bose.

The new rules, coupled with tensions on the border and rising nationalism within the country, appear to have motivated the government’s move to ban the 59 apps.

The app ban, as well as the changes to investment laws, are raising questions about the future of Chinese tech in India. US companies already appear to be taking advantage of this. This week, Google announced that it would invest $10 billion in India, including equity investments, over the next five to seven years.

With no ceasefire in sight, Chinese companies with their eyes on India may start looking elsewhere for their next big investment.

One of China’s leading disease control experts has said that that AI could play a larger role in managing future outbreaks in China, particularly in allocating scarce medical resources and identifying early signs of an epidemic.

Why it matters: At the height of the Covid-19 outbreak in China, hospitals around the country faced medical equipment shortages. Medical institutions appealed to the public for donations to fill the gaps left by the government.

• Chinese officials have been criticized for ignoring warning signs in the central Chinese city of Wuhan, despite evidence of community transmission early in the outbreak.
• The country has set goals to become a global frontrunner in AI by 2030, surpassing the US and countries in Europe.

Details: China should use big data to build an AI-based early warning system that can identify threats like Covid-19, Zhang Wenhong, director of the infectious disease department at Shanghai’s Huashan Hospital, said at the opening of the World Artificial Intelligence Conference on Thursday.

• The disease expert said that if AI had been able to identify hallmark features of the virus in December, the medical community may have been able to sound the alarm earlier.
• Nevertheless, Zhang said that data siloing in hospitals will pose a challenge to AI systems.
• In dealing with Covid-19, China imposed measures that effectively locked down more than 60 million people. Instead of AI, Zhang attributed China’s ability to control the virus to “traditional wisdom and solid urban management.”
• Zhang also said that in the future, AI’s role in resource allocation should be expanded.
• “When we sent our medical team to Wuhan we hoped that AI had been deployed across the country to know what we had and what was lacking in Wuhan. This was not the case,” he said.

Context: Zhang became a popular figure during the Covid-19 outbreak in China, leading Shanghai’s offensive against the disease and providing guidance to cities around the country.

• The doctor rose to fame in late January after telling the media that he had assigned doctors who were also Communist Party members to work on the front lines in Shanghai.
• Zhang has since become a well-respected figure in the fight against Covid-19, known for his straight talk and outspoken views on the outbreak.

China has spent much of this year trying using surveillance tools to figure out where people are. The outbreak of a major epidemic challenged the government to track people’s movements. Local governments need to know who’s arriving on trains from epidemic hotspots, and, inside cities, who has been exposed to super-spreader events like the one at Beijing’s Xinfadi market.

The country has millions of surveillance cameras, and its companies are world leaders in face recognition. But this technology has been missing in action in China’s contact tracing efforts, while companies like Sensetime and Hikvision have seen their revenues hit during the pandemic.The video cameras that line China’s streets seem to have played no role in contact tracing. Systems to monitor social media turned out to be ineffective. Covid-19 simply ran circles around China’s surveillance apparatus.

Bottom line: China has been building a camera and face recognition-based surveillance system for years and this should have been its time to shine. Instead, star surveillance companies have seen revenue decline as contracts are delayed or canceled. As a new generation of infection tracking systems are rolled out, authorities are relying on a totally different model pioneered by consumer-oriented tech giants Tencent and Alibaba.

Get one client, make it big: International media love to tell stories of China’s facial recognition-driven panopticon. As overblown as they might be at times, they’re kind of true—and they’ve bred a huge market for facial recognition and surveillance equipment companies.

• In 2013, at the annual meeting of the National People’s Congress, the country’s legislature, lawmakers announced that spending on domestic security would eclipse that of the military.
• Local governments came through. In the southwestern city of Chongqing alone, there are nearly 3 million cameras—168 for every 1,000 people—according to figures from research firm Comparitech.
• On the back of government spending, Chinese camera manufacturers have made it big. Out of Hikvision’s RMB 57.66 billion ($8.16 billion) revenue in 2019, about 70% came from China, and 40% of that came from government-related contracts, according to its annual financial results. That document does not make it clear how much of that comes from surveillance equipment.
• Facial recognition algorithms to make sense of all that video data have also raked in some big bucks.
• Sensetime has grown to become one of the most valuable AI companies in the world. The company has received backing from Softback, Qualcomm, Alibaba, and IDG Capital, among others.

Covid-era losses

A bad year: We would have expected surveillance and face recognition to hold up as Covid brought China’s economy to a halt, especially as contact tracing proved key to reopening. But the industry proved anything but immune.

• Hikvision saw its operating income decline by 5% annually to RMB 9.4 billion in the first quarter. It did not provide details to explain the fall in revenue.
• Dahua Technologies saw its revenue plummet during the same period The Chinese surveillance giant’s income fell by nearly 20% to RMB 3.5 billion. Like Hikvision, it did not explain the fall.
• Megvii was reportedly one of around 300 companies that applied for bank loans to soften the blow of the epidemic. In February the company sought RMB 100 million to bankroll technology development, Reuters reported.
• Megvii, Sensetime, and Yitu are not publicly listed, and are not required to disclose financial information.
• More than 70% of security-focused companies in China saw flagging orders in the first quarter, according to a survey by information platform China Public Security (CPS). According to CPS, 7% of security enterprises have had orders canceled

What explains the losses? It’s not clear. A plateau in government contracts and US-led limits on exports probably both contributed. The biggest contributor to losses was likely falling public spending in the first few months of the year. After years of rapid growth, China’s investments in video surveillance have largely remained flat in 2020 in spite of the massive health crisis in the country.

Aside from a single large investment in the southern island province of Hainan, in the first half of 2020, proposed government investments in video surveillance projects around China amounted to RMB 2.7 billion in nearly 160 tenders, up marginally from RMB 2.5 billion in 2019, according to a TechNode analysis of public procurement data.

• Stagnating procurements offer one explanation for surveillance companies’ recent troubles. Some of the country’s biggest AI companies—including Sensetime, Megvii, and Yitu—can largely attribute their success to government surveillance projects.
• Revenues this year are driven by contracts awarded last year. In the short, the question isn’t how much is promised but how much is actually paid. Slowing procurement is likely related to reports of delayed projects.
• Security companies have also seen significant delays to projects for which they have won tenders, according to CPS.
• Delays in large construction projects may have contributed to revenue declines for some companies, as purchases of surveillance equipment were put off along with construction following citywide lockdowns.
• To compound these issues, surveillance companies have also suffered as a result of the geopolitical tug of war between the US and China. The US placed Hikvision, Dahua, Sensetime, Megvii, and Yitu on its so-called Entity List, effectively barring them from doing business with American firms.

Bright spots: Two Chinese provinces stood out in procurement data as exceptions to the trend of falling surveillance contracts: Hebei, the province that surrounds Beijing, and the southern island of Hainan both bucked the trend.

• In 2020, 49, or around a third of all surveillance tenders, focused on Hebei. Guangdong followed, with nearly half that number.
• In 2019, the vast majority of these tenders focused on projects in Guangdong. Beijing and Shandong came in behind the southern province.
• It’s unclear why Hebei saw a peak in surveillance projects.
• One possibility is the province’s close proximity to Beijing. An effective surveillance system could act as a buffer between the capital and the rest of China and may provide more protection from subsequent waves of infections.
• The province has also been working to build a system to enforce anti-straw burning laws, prohibiting open-air incineration of straw waste.
• In Hainan, one tender worth RMB 45 billion for a project focused on provincial video surveillance sharing was made public. It is unclear whether this project has been started.

Missing in action

The dog that didn’t bark: The most surprising thing about the video surveillance industry in 2020 is what it didn’t do. As Covid-19 spread across China, the government went into crisis mode, launching efforts to track and control mobility. Despite tens of millions of cameras deployed across the country, officials turned to pen and paper to track where people were going and where they had been.

• China initially responded to the outbreak by locking down cities—stopping people from moving at all rather than tracking them.
• Travel that was allowed after the lockdowns was governed by paperwork. Train stations handed out paper health declarations as travelers returned home to their loved ones.
• Officials were given access to telecoms data including location information, which proved largely ineffective in contract tracing, only giving estimated locations of a mobile phone’s owner.
• In some cases, this data wasn’t enough to track down people government officials believed to be infected. “We did identify one man from Hubei [on the list from telecom operators]. We searched everywhere for him but just couldn’t track him down,” a cadre from a town in the southern province of Guangdong told the Financial Times.
• TechNode was unable to find any evidence that video surveillance played an important role in tracking transmissions.

Thermal cameras: Surveillance companies in China ended up deploying thermal surveillance systems in public areas. These platforms were touted to be able to measure the temperatures of dozens of people at once.

• These systems didn’t really catch on. They appeared sporadically in malls, schools, and subways, but the millions of checkpoints that government mobility mostly stuck to the infrared thermometer guns used during the outbreak of SARS in the early 2000s.

A new system emerges: As China re-opened, it built a new surveillance system to track where people went. Instead of turning to the camera companies, these contracts went to Alibaba and Tencent.

• Tencent and Alibaba developed “health passports”—mini-apps that assign each user a rating based on their health status and travel history.
• The platforms were completely novel and functioned both as an indicator of an individual’s risk of being infected but also as a way to track movement, as users were typically required to scan QR codes when entering public areas.
• Cities around China were not required to adopt the platforms, but Alibaba said in March that more they were being used in more than 200 cities.

READ MORE: How China is using QR code apps to contain Covid-19

Does video surveillance have a post-Covid future?

Companies like Hikvision and Dahua seem determined not to let the same opportunities pass them by a second time. After the virus started taking hold internationally, the two companies began marketing epidemic surveillance products abroad.

Dahua has reportedly sold thermal imaging cameras to Amazon to measure its employees’ temperatures. Sensetime has also narrowed in on temperature screening, deploying its technology at the entrances to airports and subway stations in China. Meanwhile, Hikvision’s international website is mostly focused on products aimed at adapting to the “new normal,” such as handheld thermal cameras and other thermographic devices

Nevertheless, the failure to effectively contribute to contract tracing raises questions about the industry. If they can’t be deployed to aid in a time of crisis, what are these companies selling, and does it actually work?

It all started in 2008. That year, social media giant Tencent struck a deal to invest in Outspark, a small US-based gaming company.

Now, 12 years after Outspark’s $11 million Series B, Tencent has funded more than 140 companies outside China. These investments have been part of funding rounds worth a total of $46 billion, a total that includes other investors. Tencent has driven a set of companies that includes Uber, Gojek, and the studio behind popular mobile game “Clash of Clans.”

The idea for this newsletter came from a simple question we asked late last year: Where does Tencent put its money?

We thought finding the answer would be a matter of simply doing a search on Crunchbase. Two days of data cleaning and analysis later, we realized how little we knew. How many companies has Tencent taken a stake in? And in which industries? Good data just wasn’t available. So we decided to dig a little deeper.

I’ve spent the past few weeks scraping and analyzing the data in attempting to gain a more granular understanding of how the company operates around the globe. The data is still incomplete, because in most cases, Tencent’s individual contribution in each round is a closely guarded secret. Moreover, the terms of dozens of deals have not been made public, a common practice in the tech industry.

But what has emerged is a picture of a firm with global ambitions that has fashioned itself into something of a VC, taking stakes in companies unrelated to its core offering. I’ve plotted the data and here’s what I found:

• A third of all the funding rounds in which Tencent participated were focused on gaming companies. The majority of its acquisitions are also in this sector.
• The company has focused on small but numerous investments in early-stage startups. 
• The Covid-19 pandemic has had a negligible impact on Tencent’s investment volumes. 
• Tencent has a sprawling geographical footprint, but nearly half of all the funding rounds it has participated in are US-based. 

A tech VC?

Tencent’s international portfolio dwarfs that of rival tech giant Alibaba—the focus of the last edition of this newsletter. According to my analysis, the number of companies outside China that Tencent has invested in is more than double that of Alibaba.

While gaming is one of Tencent’s most important businesses, the company has spread its bets across a range of verticals. Some have connections to Tencent products, while others appear to be simply companies it believes in.

Tencent invests in a vast array of companies, from those that it pushes billions into, to smaller startups that it deems worthy of a few million dollars.

Mobility is a big-ticket item for Tencent, totaling more than $18 billion in investment rounds, or around 40% of the value of all global rounds in which Tencent has taken part.

But the company looks a lot like a VC. It has made dozens of bets on small, early-stage startups that focus on artificial intelligence, biotech, security, and aerospace.

Tencent’s approach is vastly different than Alibaba’s. While the Chinese e-commerce giant tends to focus on investments that could aid its new retail push, Tencent focuses more on returns.

Pre-Series C startups account for around 40% of all the rounds Tencent has participated in. (Companies up to Series B are widely defined as being early-stage.) The amount of money the company has contributed to these startups makes up just 6% of the total value of the rounds the company has taken part in.

Fifteen of these companies are gaming studios, while 12 focus on fintech. Of all startups from Seed to Series H, the vast majority were Series A or Series A+.

Global focus

Tencent has investments on every continent except Antarctica. Of the country’s more than 900 investments, around 180 are outside China. The company has injected money into several focus industries around the world. In North America and Southeast Asia, the focus is mobility. In these two regions, Tencent has spent billions of dollars on companies including Uber, Tesla, and Gojek.

In Africa, Australia, and South America, Tencent has been involved in high-value investments in fintech. In India, e-commerce comes out on top, albeit by a small margin.

Meanwhile, in Europe, the company has spent the most on gaming firms, including what was—at the time—the largest investment figure in gaming history.

According to the data, Tencent has shown little interest in the Middle East, particularly Israel, which has become a major focus of Chinese tech companies. The one investment we identified in the region was in Phytech, an Israeli firm that provides IoT and analytics services to farmers.

Another trend not represented in our charts: In more mature markets such as the US, Tencent makes lots of small bets in early-stage companies. In immature markets, it makes bigger bets—less frequently—on later-stage companies.

Betting on games

Tencent has attempted to dominate the global gaming industries through acquisitions and investments. Early on, its typical approach was to stay south of a billion dollars. It bought Riot Games for $400 million, its investment in Epic Games cost $330 million, and South Korea-based CJ Games’ venture round amounted to $500 million.

But in 2016, something changed. Tencent spent $8.6 billion on the Finnish gaming studio behind “Clash of Clans.” It stands out as their largest investment in a gaming company, and probably the largest it has made outside China. The only possible larger investment is Uber’s $9 billion fundraise in late 2017, in which Tencent took an undisclosed share.

Founded in 2010, Finland-based gaming studio Supercell started off developing browser games, but quickly made the switch to mobile. In 2012, the company released “Clash of Clans“ and “Hay Day”—both of which became hits in Apple’s App Store and Google’s Play Store. Clash of Clans has remained one of the top-grossing games in the App Store.

Supercell became one of Tencent’s largest-ever investments—made through a Luxembourg-based consortium, of which Tencent owned 50%. The Chinese tech giant went on to take a controlling stake in the consortium in 2019.

The acquisition was the largest in gaming history—only Activision Blizzard’s $5.9 billion buyout of “Candy Crush” developer King came close. For Tencent, Supercell was a means to become a mobile-first gaming company abroad, which executives had previously highlighted as an area of importance as gaming shifted to handheld devices.

Supercell also allowed Tencent to drastically scale its international presence. Because “Clash of Clans” was hugely popular outside China, buying Supercell was a way to quickly increase Tencent’s international market share.

For the most part, the values of Tencent’s gaming acquisitions were not disclosed. Details of the deals were shared in just five cases.

In the past 12 years, Tencent has invested in 11 gaming companies over 43 funding rounds. The value of these rounds total $11.6 billion, excluding those in which the terms were not disclosed.

No Covid slowdown

As Covid-19 began spreading across China in early 2020, the government took measures to limit the impact of the virus. Authorities shut down entire cities, bringing the economy to a halt.

According to the data, however, Tencent kept investing. The company took part in an average of four funding rounds per month during the first half of the year. Thus far, that amounts to 17 investments between January and June. During the same period in 2019, that number was 12.

At this rate, Tencent could outpace its 2015 high of 30 global investments.

Tencent’s sustained investments in the age of Covid-19 set the company apart from other VC investors, who had already been cutting back their investments before the pandemic hit. Tencent also stands alone among its peers, making smaller bets on lots of companies in various sectors in the pursuit of return on its investments.

If this trend continues, Tencent could keep the fire burning through China’s VC “ice age” and a slowdown in investments abroad, giving it more influence over global tech and positioning it for a post-Covid-19 world.

Search giant Baidu has released a toolkit for machine learning that allowing researchers to build and train quantum neural networks.

Why it matters: Tech giants around the globe have increased their focus on quantum computing. Baidu set up its Institute for Quantum Computing in March 2018.

• Meanwhile, Google released its quantum machine learning framework, Tensorflow Quantum, in April this year.
• Microsoft has also pushed to provide quantum computing solutions to the public. In November, the company released a private preview of Azure Quantum, a quantum cloud computing service, with plans for wider rollout in the future.

Details: Baidu’s Paddle Quantum, built on top of the company’s deep learning platform Paddlepaddle, consists of a set of machine learning toolkits, including quantum development tools, a quantum chemistry library, and a set of features for optimization.

• Baidu claims that the toolkit is the first deep learning framework in China to support quantum machine learning.
• The platform allows develops to build simple quantum neural networks or develop their own models from the ground up, Baidu said.
• Paddle Quantum is “more flexible” than similar systems by other companies, according to Baidu. The company claims that it has been able to simplify the implementation of a promising quantum algorithm by 50%.
• Dubbed the Quantum Approximate Optimization Algorithm, researchers believe it could outperform classical algorithms in the next few years.

“From now on, researchers in the quantum field can use Paddle Quantum to develop quantum artificial intelligence, and our deep learning enthusiasts have a shortcut to learning quantum computing.”

—Duan Runyao, director of Baidu’s Quantum Computing Institute

Context: As development of traditional computers reaches its peak, researchers are looking to quantum computing to drive the next wave of artificial intelligence. The technology is based on quantum mechanics and is still in its infancy.

• Nevertheless, Google scientists last year said they have made a major breakthrough in quantum computing. The company claimed that they had developed a quantum processor that could complete in just seconds a computation that would take a traditional computer thousands of years.
• Chinese companies including Alibaba, Tencent, and Huawei have also set up quantum computing research labs.

In its latest rebuke against China, the United States said on Friday that it will add nearly three dozen Chinese companies and institutions to a trade blacklist over their alleged involvement in human rights abuses or their ties to the country’s military.

Why it matters: The move comes as lawmakers and political advisors meet in Beijing for the Two Sessions, one of the most important annual events on China’s political calendar.

• Being added to the trade ban effectively bars the companies from buying products and technology from American firms without approval from the government.

Details: The US Department of Commerce added nine companies and institutions to the trade ban for their alleged complicity in human rights abuses in China’s northwestern Uighur Autonomous Region. Of these, seven companies have were added to the so-called “Entity List” for “enabling China’s high-technology surveillance” program.

• These seven companies include facial recognition firms Cloudwalk Technology and Sensenets, surveillance company Netposa, and AI chipmaker Intellifusion, according to a commerce department statement.
• Meanwhile, the US has also blacklisted 24 companies and institutions for their alleged ties to China’s military, the commerce department said in a separate announcement. These include high-profile cybersecurity firm Qihoo 360 and Softbank-backed robotics firm Cloudminds.
• Qihoo responded in a strongly worded statement, saying that the company “firmly opposes” the accusations.
• Several universities and research institutions were also been included on the Entity List for being involved in or posing a significant risk for becoming involved in activities that could affect US national security, including the Harbin Institute of Technology and Beijing Computational Science Research Center.
• The blacklisting aims to prevent China from using US commodities and technologies in activities that undermine the country’s interests, Secretary of Commerce Wilbur Ross said in the statement.

Context: The move marks Washington’s latest offensive against Chinese tech companies in an ongoing spat between China and the US.

• In October, the US placed several Chinese artificial intelligence and surveillance companies on the blacklist, including AI firm Sensetime, facial recognition company Megvii, and surveillance camera maker Hikvision, among others.
• The US has also sought to limit Huawei’s involvement in its 5G rollout, citing national security concerns.

What do the global empires of China’s tech giants look like? It’s a harder question than you might think.

I’ve been wondering about this since last year, when we took a look at Tencent’s overseas investments. Trying to map out the company’s web of funding rounds and acquisitions, we realized this simple question is actually really hard to answer.

Startup investing is an opaque world—while private companies usually announce the names of participants in their fundraising, no one knows how much the players put in. There’s sources like Crunchbase that compile this data, but getting a full picture is not easy.

That’s why we’re launching a new reporting project: Expanding empires, a monthly newsletter about our efforts to map the global profiles of China’s biggest investors.

I’ve been building web spiders to gather data, analyzing it, and then visualizing the results. Our first focus: Alibaba.

Since 2010, the company, along with its fintech affiliate Ant Financial, have participated in global funding rounds for 66 companies. These funding rounds raised a total of $20 billion and helped drive the success of household names like Magic Leap, Lazada, and Zomato.

So where is Alibaba putting its money? What does its empire look like?

I scraped information about hundreds of Alibaba deals from corporate data platforms, and cross-referenced it with news accounts to identify the 66 overseas companies, revealing an evolving narrative that tells the story of a drastic shift in the company’s overseas strategy. 

Corporate giants jealously guard information about their investments in order to avoid tipping off their rivals. As a result, the data is incomplete and presents only the total value of each funding round rather than Alibaba’s individual contributions. 

In 10 years, Alibaba went from having no international footprint to making investments around the globe with more frequency and value. In its early days, the company went big on US investments. But later, it pivoted sharply to India and Southeast Asia, where it has placed big bets on well-established companies in developing markets.

Humble beginnings

In 2010, Alibaba made its first big deal outside China, according to the data I collected. 

The company was no stranger to bets on up-and-coming companies, but it had stayed close to home. 

In China, it had already participated in funding rounds totaling around RMB 435 million (about $61 million at current exchange rates), investing in companies from appliance giant Haier to courier firm Best Logistics. At the time, Alibaba had been listed in Hong Kong for three years and was operating e-commerce platforms serving millions of people in China. The company’s international footprint, however, was still small. 

But this was starting to change. In 2010, Alibaba launched a $100 million investment plan for its global online retail business AliExpress. Under the plan, Alibaba acquired US e-commerce software provider Vendio for an undisclosed amount—the Chinese company’s first major investment in the US.

The deal was a watershed moment for Alibaba, representing a significant advance in its push abroad. 

For the five years after its first US acquisition, Alibaba had its eyes trained on American companies. Around 90% of the 17 investment rounds the company took part in between 2010 and mid-2015 involved US firms, according to TechNode’s analysis.

During this time, Alibaba twice invested in ride-hailing platform Lyft, and once in social media giant Snap, both of which were already well established. These three deals totaled $4.5 billion. The company focused mostly on later-stage startups, the majority of which were Series C and above.

Unsurprisingly, a lot of the companies Alibaba invested in operated e-commerce businesses. Alibaba took stakes in companies like 1stdibs and Shoprunner, and Jet.com and Zuily. But many of its investments also focused on industries far from the realm of online shopping. 

Alibaba bet on industries that would eventually come to complement its new retail push, as well as those that would later inform features on its massive online marketplace Taobao. 

The company invested heavily in augmented and virtual reality technologies, and added to a portfolio of social media and messaging companies, an area where it had already fallen behind in China. 

But from mid-2015 onwards, the company went through a drastic shift, broadening its view beyond investments in the US. Instead of looking across the Pacific for opportunities, it began searching closer to home.

Alibaba changes direction

While Alibaba had its eye on the US market, the company itself went through a series of fundamental changes. In 2012, the world’s largest online marketplace delisted from the Hong Kong Stock Exchange. 

“Just as the IPO was a starting point for Alibaba.com and not the finish line, [the] privatization is not the end but rather a new beginning,” Jack Ma wrote in a letter to employees early that year. 

He was right. Just two years later the company went public on the New York Stock Exchange. At the time, it was the largest IPO in US history. 

But the year following its New York IPO was disappointing. The company was plagued by slowed growth, fierce competition, and a flagging Chinese economy. Alibaba’s share price plummeted by around 40% from a post-IPO high of $115 in the year following its listing as consumer spending slowed at home. At the end of 2015, the company’s total annual sales growth fell to its lowest point in three years. The company began looking for ways to boost its bottom line.

Alibaba began investing in companies with more frequency. Between 2010 and mid-2015, the Chinese e-commerce giant had participated in 17 investment rounds. It took just a year from June 2015 to mid-2016 for the company to reach the same number. 

But as it ramped up deal-making, the company was turning from the US to the emerging markets of Asia. 

Between 2010 and 2015 Alibaba participated in 17 US-based rounds. In the last three years, from 2017 to 2020, that number dropped to just five. Meanwhile, the company has participated in 19 rounds in India and eight in Southeast Asia (SEA).

Alibaba clearly saw potential for growth in these two regions. Both India and SEA have experienced an explosion of startup founding. In the initial stage of the boom, these areas were similar to China in the early 2000s, with massive populations, underserved markets, and growing pools of tech talent.

It was fertile ground for Alibaba. 

The company’s first Indian investment came in August 2015. Unsurprisingly, it was an e-commerce company much like Alibaba’s Tmall. The firm, Snapdeal, was founded in February 2010 and has risen through the ranks to become one of India’s largest e-commerce companies. 

Alibaba then went on to invest in a slew of other Indian companies. These included fintech giant Paytm, e-commerce platform Paytm Mall, grocery delivery business Bigbasket, and restaurant aggregator and food delivery platform Zomato.

Alibaba’s bets paid off. At least five of the companies it plowed money into have reached unicorn status. Paytm and e-commerce company Paytm Mall have collectively raised around $3.6 billion in rounds in which Alibaba and Ant Financial participated. Paytm is now worth more than $16 billion. 

Alibaba’s most frequent Indian investments focus on e-commerce and food delivery. The company has invested in both Zomato and Bigbasket five times. Bigbasket’s Alibaba-backed rounds have landed the company $650 million.

Massive acquisition

An e-commerce company is only as strong as its logistics network. Alibaba knew this. So it entered Southeast Asia through Singapore’s publicly-listed postal service.

In 2014, the Chinese e-commerce giant invested nearly $250 million in Singpost. A year later, it followed up with a $148 million cash injection. 

Then, it bought one of SEA’s biggest e-commerce companies.

Lazada was founded in 2012 by German entrepreneur Max Bittner with backing from Rocket Internet. In four years, it became the biggest e-commerce company in SEA. 

Alibaba acquired a controlling stake in the Singapore-headquartered company in 2016. It was Alibaba’s biggest overseas deal. It followed up a year later with another $1 billion investment, upping its stake from 51% to 83%. Then, in 2018, it plowed in another $2 billion.

Lazada is now Alibaba’s de facto representative in SEA. The company currently has operations in Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. 

Alibaba is attempting to duplicate its success in China, applying what it has learned to new markets. At the time of its last investment, the company said that SEA is a “key part” of its global growth strategy.

But Alibaba didn’t stop there. The e-commerce giant and Ant Financial have participated in rounds worth at least $6.75 billion in the region, though, like in most regions, the value of several funding rounds was not disclosed. 

Alibaba also counts Tokopedia, an e-commerce unicorn from Indonesia, as part of its family. The Chinese tech giant has participated in rounds worth $2.2 billion in the Southeast Asian company.

Alibaba: e-commerce empire

With billions spent on dozens of companies in its portfolio, Alibaba has become a major player in the world of startup funding. But unlike peer Tencent, the company doesn’t appear to have aspirations to become a global venture capital firm. 

My analysis reveals a simple investment strategy: Alibaba invests in companies to help its mission of global e-commerce conquest. While it primarily focuses on investments in e-commerce, it also branches out into companies that support the industry, including online payment platforms. 

The company has mostly abandoned the US, which is dominated by Amazon, in favor of markets it could win yet. Alibaba is betting big on SEA, home to Lazada—its biggest investment yet. 

With Lazada, the company has bought a major presence in SEA. But reporting suggests that integrating it into the Ali empire has been a challenge.

Sensetime, one of China’s highest-profile artificial intelligence startups, is looking to raise $1 billion after seeing wider adoption of the company’s technology during the coronavirus pandemic.

Why it matters: Fresh funding for Sensetime could signal that investors are regaining confidence after the Covid-19 outbreak in China. Money has been scarce for China’s tech startups in the wake of the epidemic.

• Venture capital investments in China dropped by a third during the first quarter compared with the same period a year ago, according to data from business information provider Itjuzi.
• Total investment fell to RMB 119.1 billion ($16.7 billion) in Q1 from RMB 173.6 billion during the first three months of last year.

Details: The $1 billion investment could give Sensetime a valuation of at least $9.5 billion, up from $7.7 billion at the end of 2018, the Wall Street Journal reported, citing people familiar with the matter.

• The round of funding would be the last before an initial public offering (IPO), the people said.
• Earlier this year, Sensetime reportedly delayed its plans to go public, looking instead for up to $1 billion in private funding. The company believed it would see more success in its IPO if it waited, sources said at the time.
• Since the start of the Covid-19 outbreak in China, Sensetime has seen widespread use of its contactless temperature-monitoring technology, which has been deployed in metro stations, office buildings, and factories around China.
• The company declined to comment when reached by TechNode on Monday.

Context: Nevertheless, China’s biggest AI companies have faced increased pressure since several firms were placed on the US Entity list in October.

• US authorities placed Sensetime, face recognition giant Megvii, speech recognition firm iFlytek, and surveillance camera maker Hikvision on the list, effectively barring them from doing business with American companies without permission.
• Sensetime has been moving to make its business more globalized, opening offices or research centers in Japan, Singapore, and the United Arab Emirates.

Chinese electric vehicle startup Xpeng has never been shy about its Tesla fandom.

Xpeng founder Henry Xia took Musk up on his offer. That same month, he and two friends started their own autoworks in Guangzhou.

Tesla v. Cao

Today, Tesla’s attitude has changed. It argues that Xpeng crossed the line from imitation to theft. Tesla is suing its former employee Cao Guangzhi, alleging that the engineer misappropriated code for its Autopilot driving assistance function before leaving to take a job at Xmotors, Xpeng’s US-based sister company. At stake is Xpeng’s reputation, the limits of competition, and the ability of Chinese companies to hire leading engineers from Silicon Valley.

As TechNode wrote last week, Tesla is using the case against a former employee to justify a broad hunt through a competitor’s files to find proof of its IP theft suspicions.

Neither Xpeng nor Xmotors has been named in the lawsuit, but Xmotors has been listed as a third party in the proceedings. The company has argued that Tesla’s moves are aimed at “bullying and disrupting” it.

Tesla has asked a San Francisco court to allow it access to its competitor’s entire repository of autonomous driving code and clones of its executives’ hard drives—including those of He, its CEO. A hearing on the matter was due to take place on May 7 in a San Francisco federal court, but has been delayed until May 28.

If Tesla wins its motion, Xpeng will have to hand over much of its most sensitive information. Even if Tesla ultimately loses the lawsuit, it would send a message that engineers who switch jobs to Chinese employers are automatically suspected, which could chill recruiting for years.

How did it get so bad?

TechNode reviewed public court documents, spoke to industry insiders, interviewed Chinese lawyers about the case, and attempted to reach Cao’s friends. What emerged was the story of a tragic relationship—a group of Chinese EV enthusiasts who loved Tesla so much they tried to become it, and an American company that went from nurturing competitors to accusing them of theft.

Tesla and Cao’s attorneys did not respond to TechNode’s requests for comment.

Bidding for talent

To compete in self-driving technology, Xpeng began recruiting engineers from top Silicon Valley companies, including Tesla and Apple, in 2017. For years, Tesla engineers have been sought after as some of the most capable leaders in the future of driverless mobility. These employees have been chased by US tech companies hungry for self-driving talent, as well as by Chinese tech firms with US operations.

When Xpeng hired Gu Junli, a young engineering manager from Tesla, they made her vice president of autonomous driving. The promotion allowed Gu to jump three ranks up from her previous job—equivalent to 10 years in the career of a typical engineer. Xpeng also issued a press release boasting that she was a “leading figure” in Tesla’s machine-learning technology.

But Gu’s Tesla resume did not automatically lead to success. One year after joining the company, Chinese media reported, she was missing her targets. Two persons close to Xpeng told TechNode she was just too inexperienced to build a team that could compete with the giants in a field like self-driving.

In December 2018, Xpeng replaced Gu as head of the team with a hire from Qualcomm, Wu Xinzhou. It was Wu who would later recruit Cao from Tesla.

Gu was given another job as a leader for development of “advanced” technologies, but was later sidelined. She left the company in March.

Sincerest form of flattery

In 2018, Xpeng launched its first production vehicle, the G3. At the time of launch, the vehicle had a range of around 350 kilometers and shipped with driver assistance features. Observers noticed several similarities between the G3 and Tesla’s Model X and Model S—from the front profile of the car to the interior dash design.

This influence came as no surprise, given how open Xpeng had been about where it had drawn its inspiration.

Xpeng had a lot in common with the Chinese smartphone giant Xiaomi, one of the company’s recent investors. When Xiaomi began operating, it took many of its cues from Apple—so much so that it was often called an Apple clone. The company adopted the same minimalist aesthetic as its US counterpart, but quickly began developing its own signature line of devices, from smart home equipment to computers, clothing, and cookware.

But copying an idea is not against the law. “The reason Apple won’t sue Xiaomi is that, while their products look similar, they don’t necessarily constitute copyright infringement,” Fang Chaoqiang, a lawyer at Beijing-based Yingke Law Firm, told TechNode.

Xiaomi is the poster child for an argument that critics of IP law have made for years—if the Chinese company had not been able to learn from Apple, dozens of innovative products would never have come on the market.

Allegations emerge

If Tesla took issue with the G3’s similarities to its own vehicles at the time of launch, it didn’t say much. In Musk’s 2014 patent blog post, he wrote that manufacturers of gasoline-fueled vehicles were the company’s main competitors, not rival EV companies. Indeed, the 16,608 vehicles Xpeng shipped in 2019 were a drop in the ocean compared to Tesla’s sales.

But after US-based Xpeng engineer Zhang Xiaolang was arrested by the FBI for stealing Apple IP while switching jobs in July 2018, rumors simmered that the Chinese company was cheating to catch up. Zhang was arrested on July 7, 2018, after Apple accused him of downloading sensitive information before he resigned to take a job with Xmotors in China.

Xpeng leaders deny that they encouraged Zhang to misappropriate Apple’s IP. The company added that there is no evidence Zhang transferred sensitive information from Apple to Xpeng, and that the engineer’s contract has been terminated.

The fallout for Xpeng’s reputation was immediate. Now, the company faces challenges in hiring talent, as US-based Chinese engineers have reportedly distanced themselves from the company.

In the 29 reviews about Xmotors to be found on job search website Glassdoor, three employees addressed concerns that their career prospects might be affected by these lawsuits, since “no one wants to hire someone from a company with all the public news about FBI investigation.”

An Xpeng spokesperson told TechNode that the company has not had trouble hiring new engineers in the US or China.

Cao, then an engineer at Tesla, condemned Zhang, the former Apple employee, in text messages that have since become public in the course of the lawsuit. Zhang’s case would cause a “bad impression on us Chinese,” he said, according to translated message transcripts.

Xpeng hires Cao

When Wu Xinzhou, Xpeng’s new self-driving team leader, interviewed Cao about a job as “head of perception” in late 2018, the Tesla employee was concerned about how the job switch would look. Cao later told the court that Wu had soothed his worries by saying Xpeng “did not get involved at all” in Zhang’s actions.

Cao was a high-flying computer vision expert and a natural fit for the perception job. With both a bachelor’s and master’s degree in electrical engineering from Zhejiang University—one of China’s top schools, which houses an entire startup accelerator in an ultramodern egg-shaped building at the center of campus—and a Ph.D. from Purdue University, he’d worked on medical applications of computer vision at GE and Apple before working at Tesla.

Cao joined Xpeng in January 2019.

Just two months later, he was in court.

Xpeng’s work on autonomous driving had begun long before Cao joined them. The company was developing its driver assistance technology as far back as 2015, three years before its first mass-produced vehicle was released. Level 2.5 autonomous driving capabilities were included in the G3 upon delivery in early 2019. Xpilot includes assisted lane changing, cruise control, lane centering, and automatic speed limitations.

But in December 2019, Musk aired suspicions on Twitter that Xpeng was copying Tesla’s code. When a Twitter user with the moniker “The Cyber Pope of Muskanity” suggested that Xpeng had stolen Tesla’s software, Musk replied, “That’s certainly our impression.”

When Cao left Tesla in January 2019, the company suspected another engineer, surnamed Zhang. In addition to a shared nationality, both engineers had previously worked at Apple—though Cao has testified that they worked in separate divisions located at different buildings and campuses.

When Tesla found out that Cao had copied files to a personal computer, they decided that he had taken the code for his new employer. In March 2019, the company filed a suit against Cao, formally accusing him of misappropriating code by copying it to his personal iCloud account.

Fool me twice?

Tesla is trying to paint Xpeng as a repeat offender that poached engineers in order to gain access to IP, said a Chinese lawyer who spoke to TechNode under the condition of anonymity. Successfully linking the cases could have serious reputational implications for Xpeng.

Tesla admits that it can’t prove the theft.

Unlike smartphone design, in the world of self-driving software, it’s difficult to tell if someone has copied your product without actually getting your hands on the code. Tesla claims, in essence, that the fact that Cao had the code when he left Tesla is so suspicious that they should be allowed to rifle through Xpeng’s files in an effort to prove that the Chinese company used it.

Tesla’s case is built heavily on parallels between Cao and Zhang, but the company argues that its document requests will allow it to find proof. Cao has admitted to downloading files to a personal computer, but claims it was common practice at the company.

Other evidence submitted by Tesla is weaker. For example, an edited translation of Cao’s text message exchange about the Zhang case made it appear that Cao was speculating about how much money Zhang had gotten from Xpeng—when in fact this message was sent by his friend. Cao had responded by condemning Zhang’s actions.

Tesla’s case against Cao and the US authorities’ move to indict Zhang are two independent lawsuits, at least for now, said Lin Hang, a lawyer at Guangzhou-based F&P Law Firm. There are different parties involved in each case; moreover, Cao’s is a civil case, while Zhang’s is criminal. Xmotors is a third party in both. 

Lin questioned the grounds of demonstrating a pattern of misconduct by Xmotors in its operations and recruiting. “You can’t just say C stole from D because A allegedly stole from B,” he said.

Another counsel, who wished to remain anonymous, was pessimistic about Xpeng’s chances, as the US has increasingly treated all Chinese companies as potential IP thieves. Tesla’s move against Xpeng may trigger more US tech companies targeting Chinese competitors for intellectual property theft, he said.

Whether he wins or loses, Cao’s life has been permanently changed. Xpeng placed him on administrative leave “until further notice” in March 2019, when the investigation began. His position has since been filled by a subsequent hire. The damage to his reputation will likely last much longer.

A non-compete by any other name …

In 2014, Musk wrote that Tesla’s leadership was defined by its ability to “attract and motivate the world’s most talented engineers.” Nowadays, he’s less willing to compete for talent.

In its complaint against Cao, Tesla cited Xpeng’s pursuit of its engineers as part of a pattern of “copying,” writing that “at least five former Tesla Autopilot team members including Cao have gone to work for Xmotors.” Xpeng, and other Chinese EV startups, are known in the industry for recruiting Chinese employees from US tech giants with highly competitive salaries and stock option plans.

If Tesla wins its suit, it could have broad effects on the market for tech talent, scaring off engineers who had been considering working for Chinese companies.

Hiring away a rival’s staff is a normal part of competition, and Silicon Valley was built on disloyal employees. In the US, California is the only state that bans non-compete agreement—contracts are common throughout the rest of the US—and this fact is often credited with spurring the state’s culture of entrepreneurship.

Nevertheless, as tech giants turn into corporate behemoths, they’ve taken a more possessive attitude in regard to their employees—and the US’s Department of Justice (DOJ) has taken notice. In 2010, the DOJ alleged that companies including Apple, Adobe, Intel, and Google had made a deal not to recruit each other’s employees, limiting competition in the labor market and holding down salaries for coding talent. The measures effectively barred rivals from reaching out to potential employees at competing companies to offer them new positions.

In 2011, the companies settled with the DOJ, promising to end the practice. Subsequently, in 2015, they agreed to pay $415 million to settle a related class-action lawsuit in order to compensate around 64,000 employees.

While tech firms can’t use non-compete agreements to retain their employees, if Chinese engineers who start jobs at rival companies face probes or life-altering lawsuits, they are effectively bound by fear of repercussions from moving to better jobs.

Is Xpeng ready to leave the nest?

For most consumers, an Xpeng is still just a cheaper version of a Tesla. But as the company fights in court to prove that it’s not stealing IP, it is making moves in self-driving in an effort to find its own identity.

Xpeng has seen several changes in its self-driving team since Tesla began its legal offensive. Gu, the young Tesla hire who previously led autonomous driving, finally left the company this March due to “personal career and family reasons,” after reportedly being idle from any management roles for a couple of months.

Meanwhile, Cao’s position has been filled by Wang Tao, the co-founder of Drive.ai, the self-driving startup acquired by Apple in June 2019, according to Xpeng slides that were shared with the media last year.

Xpeng is forging on. In March, the company launched its first electric sedan model, the P7. The vehicle is equipped with Xpilot 3.0, Xpeng’s latest driver assistance system. The EV startup is attempting to follow the path set by backers Alibaba and Xiaomi—from copycat to Chinese original. It’s promising self-driving technology software and hardware that is different from Tesla, with executives claiming that its systems are optimized to better handle China’s crowded roads.

“I strongly believe that P7 will provide the best driver-assist experience in China,” Xpeng’s He said during the sedan’s launch event last month.

As the legal battle between Tesla and Xpeng heats up, the P7 could allow Xpeng to show that its days of imitating Tesla are over. But the stakes are high. EV leaders expect bankruptcies to dominate the headlines. Li Xiang, the founder of rival EV firm Lixiang, recently warned: “Given the hardship in the Chinese auto market, there is a possibility that only three out of more than 100 EV startups could survive … and I hope Nio and Xpeng can be with us.” It may all come down to a judge in San Francisco.

Smartphone apps from several of China’s top banks over-collect user data and force customers to give up personal information to use their apps, according to a report released on Friday.

Why it matters: Chinese authorities have attempted to crack down on widespread unnecessary data collection over the past year, calling out companies for collecting more personal information than necessary.

• In December, legislators promised to start drafting China’s own laws for data privacy and personal information, moving away from the fragmented laws governing personal data protection.
• Earlier this week, China’s banking sector recently found itself in the spotlight after a popular comedian complained that China CITIC Bank had shared his personal information with a third party without his permission.

Details: The Pudong Development Bank, Bank of Beijing, Bank of Shanghai, and Bank of Jiangsu force users to give access to their mobile phone information in order for the banks’ apps to work correctly, the Nandu Personal Information Protection Research Center said on Thursday.

• The Agricultural Bank of China requests access to a user’s contacts, location, calendar, and camera, among others. The bank’s privacy policy only specifies why it needs access to location data, Nandu said.
• The organization said that financial institutions should only require access to a device’s storage, according to national standards governing data collection in apps, and apps should work correctly if a user chooses not to authorize access to certain data.
• However, most apps need access to information about a mobile phone as well as their location data.
• Some apps will obtain permissions by default, bypassing the need for users’ to authorize access.
• The Nandu Personal Information Protection Research Center is a think-thank affiliated with the Southern Metropolis Daily, a newspaper in the southern Chinese city of Guangzhou. The organization investigated apps from 20 banks in China.

Context: China introduced its landmark Cybersecurity Law in 2017, which has served as a framework for developing data protection regulations.

• Since then, companies including Tencent, Xiaomi, and Sina Weibo have found themselves at odds with the law for their data collection practices. Fintech companies have been some of the worst-hit given the sensitive nature of the data they collect.
• The outbreak of Covid-19 in China earlier this year prompted the Cyberspace Administration of China (CAC), the country’s internet watchdog, to restate data collection rules following data leaks after people from the areas at the center of the outbreak found their personal information circulating online.
• The CAC has also sharpened its focus on non-consensual personal data collection, in which apps lack a privacy policy or do not include prompts for users to read how their data will be processed when they first use the app.

In an unprecedented move, US-based electric vehicle maker Tesla has made a request to examine a competitor’s entire repository of autonomous-driving source code and senior executives’ hard drives as part of a lawsuit against a former employee.

Cao served as head of perception at XMotors, though he has been on leave since the investigation began. Tesla alleges that Cao copied Autopilot source code during his time at Tesla, and that the software could have benefited Xpeng.

Now, one year after filing a suit against the Chinese engineer, Tesla is attempting to gain access to a vast array of Xpeng’s internal communications and proprietary code in a push to indict Cao. Court documents reviewed by TechNode reveal that Tesla is taking an extraordinarily aggressive approach to the dispute with its smaller rival.

Tesla argues that Cao’s arrival at XMotors mirrors that of former Apple engineer Zhang Xiaolang, who was arrested in the US on charges of stealing proprietary information related to Apple’s self-driving car project before joining XMotors.

Xpeng is hardening its stance in the escalating legal battle with Tesla in an uncharacteristically public way.

Tesla’s offensive

Tesla first filed a civil complaint against Cao in March 2019, claiming the engineer had copied Autopilot-related source code to his personal iCloud account in a nine-month period before leaving Tesla. Neither Xpeng nor XMotors have been charged in Tesla’s suit.

In July 2019, Cao acknowledged that he had downloaded and stored Tesla source code on his personal laptop, but pleaded not guilty to theft charges. The dispute remained at a deadlock.

In November of 2019, Tesla issued its first subpoena to XMotors, seeking a broad array of information, including “all non-privileged” internal communications involving Cao. The request included any correspondence on the popular messaging app WeChat that was related to Tesla and Autopilot.

Tesla also requested Cao’s personal messages to XMotors employees, as well as his compensation and employment terms with Xpeng. XMotors responded to Tesla’s request in December by filing 6,333 pages of documents. An initial investigation found no evidence that XMotors encouraged Cao to exploit Tesla’s source code for its benefit. 

After nearly a year of litigation, Tesla issued a second subpoena to XMotors this January, requesting an array of documents as well as XMotor’s entire repository of autonomous-driving source code from before Cao was recruited, to after he was placed on leave in March 2019.

Tesla’s request extended to images of entire hard drives from various Xpeng employees’ work computers, including those of the company’s CEO He Xiaopeng and president Brian Gu. The request also demanded that Xpeng make an employee available for an interview.

Tesla’s latest requests have infuriated the domestic EV startup. This is “just a fishing expedition meant to bully and disrupt a young competitor,” Xpeng said in an announcement released April 24, just two days before the company launched the P7, its first sedan model, which competes with Tesla’s China-made Model 3. The Chinese EV maker said that Tesla’s request to broaden the scope of the investigation is “based on nothing more than sheer speculation.”

Most notably, Tesla asked XMotors for documents related to a case against Apple’s former employee Zhang Xiaolang, looking for a pattern of misconduct by XMotors in its operations and recruiting. What has caused the American EV giant to prolong its campaign against its Chinese rival? Here are some of the key findings revealed in the recent documents filed by XMotors in US courts.

Opposing views

Tesla’s arguments: The US EV giant is seeking to connect a previous employee accused of stealing trade secrets before joining Xpeng and the latest case against Cao. Tesla is also suspicious about the conditions under which Cao left the company.

• Cao copied more than 300,000 Autopilot files from a working computer to his personal iCloud account before starting at XMotors in January 2019, Tesla said in the lawsuit filed last March. The Silicon Valley carmaker also raised suspicions about Cao transferring confidential information to his new employer by noting that he gave only one day’s notice before leaving his job at Tesla.

• Tesla claims that Cao copied its Autopilot source code onto a Sandisk thumb drive, a popular brand of USB storage device. According to information gathered during Tesla’s investigation, a Sandisk drive was then inserted into an Xpeng-issued laptop. Cao’s personal device “could be the same” as the one inserted in Xpeng’s computer, Tesla argues.
• Tesla’s latest demands for documents related to the arrest of former Apple employee Zhang Xiaolong were made on the grounds that Cao texted a friend saying, according to a disputed translation from Chinese, that “I guess they [Zhang and Xpeng] agreed on the price before to get the documents.” Cao’s work experience at Apple had also caught Tesla’s attention, causing the EV giant to wonder if Cao knew or had contact with Zhang—and whether the two engineers had acted in concert.

Xpeng’s testimony: Meanwhile, Xpeng and Cao have contradicted Tesla’s claims, arguing that conversations between the engineer and his colleague had been mistranslated.

• Cao cloned the entire Autopilot source code repository to his personal computer, without telling anybody or asking if he was permitted to do so, according to his testimony in a deposition held earlier this year. Cao said he thought it was “common practice” for engineers at Tesla. “Everyone was using personal devices, personal storage, cloud storage to access Tesla information,” Cao said.
• Cao’s testimony contradicts Tesla’s claims that he only gave one day’s notice before leaving the company. Cao said he told his then-supervisor in late December 2018 that he planned to leave and expressed willingness to stay as long as necessary to ensure a smooth transition. “I don’t know who made that lie intentionally or unintentionally,” Cao said of his disputed resignation date.
• Xpeng challenges Tesla’s translation of the text message exchange. According to a certified translation, it was the friend who first brought news of Zhang’s arrest to Cao’s attention, not vice versa. It was also Cao’s friend who sent the text message about payment for documents to Cao. Cao rebuked the friend, saying, “It creates really bad impressions of us Chinese people.”
• Cao denied knowing Zhang, the defendant in Apple’s pending criminal case. “He and I did not work in the same division at Apple … and our respective engineering groups were located in different physical buildings and different campuses,” Cao wrote in his testimony.

In competing with their US counterparts, Chinese companies have long been known to seek shortcuts by poaching their employees. However, it is also true that not every job switch amounts to trade secret misappropriation. At the moment, Tesla’s suspicions remain mostly hypothetical: XMotors has not been named or charged in either the criminal case against Zhang or the civil action with Cao.

“We have engaged in no wrongdoing and we have fully cooperated with Tesla for months, including voluntarily providing our own confidential information. However, Tesla’s latest demands crossed the line, seeking to rummage through our IP on Tesla’s terms,” the company said in an announcement issued last week. Tesla did not respond to a request for comment.

Is Xpeng a threat?

In its court filing of last week, XMotors said Tesla’s latest demands are an attempt to “obtain competitive information” in order to make their rival less competitive. On the other hand, Tesla claimed it had no interest in the substance of XMotors’ source code but rather wants to ascertain whether there is anything resembling its intellectual property.

Given Tesla’s dominant position in the Chinese EV market, the argument is plausible. The US carmaker delivered more than 16,000 EVs in China during the first quarter of this year, representing nearly a third of market share—even as domestic EV giant BYD faltered amid the Covid-19 outbreak. Tesla’s first-quarter sales in China are on par with nearly all of Xpeng’s annual deliveries, a margin wide enough to solidify Tesla’s leadership in the market.

Tesla’s dominance could be challenged by companies like Xpeng, which launched its first electric sedan this week. Xpeng claims the P7 is the first “L3 autonomy-ready” production vehicle with the longest driving range in China.

The company also claims that its assisted-driver system Xpilot differs from those of its rivals because it is tailor-made for congested Chinese traffic situations. CEO He Xiaopeng promised to offer the “best user experience” with features that include autonomous lane changing on highways—to be made available via an update next year.

At a third of the price of Tesla Model S, Xpeng’s newest vehicle has elicited strong interest from some Chinese EV enthusiasts. “The P7 could be the most cost-effective EV sedan available in the market,” said one netizen in a WeChat group for EV fans after Tuesday’s press conference.

Although it’s still unclear whether the P7 could be a “Tesla killer” that may also help Xpeng outperform its Chinese rivals, the two companies’ escalating court battle and the fight for pole position in the world’s largest EV market is only just beginning.

Correction: A previous version of this newsletter incorrectly stated that two former Apple engineers joined Xpeng after leaving the US tech giant. Only Zhang Xiaolang joined the company. This text has also been amended to clarify that Cao Guangzhi was placed on administrative leave in March 2019. 

Tencent-backed cloud artificial intelligence-training platform Enflame Technology has raised RMB 700 million ($98.6 million) in Series B funding, the company said on Thursday.

Why it matters: The coronavirus pandemic has made raising money more difficult for cash-strapped startups. In the first quarter, venture capital investments in China dropped by a third compared with the same period a year ago, according to data from Itjuzi.

• Total investment fell to RMB 119.1 billion in Q1 from RMB 173.6 billion last year.
• Nevertheless, the development of artificial intelligence is a priority for China, with the government setting ambitious goals to become a forerunner in the technology by 2030.

Details: Enflame Technology has closed its RMB 700 million Series B, with Beijing-based private equity firm Summitview Capital leading the round.

• Government-backed Shanghai Innovital Capital, Red Dot Capital, Redpoint Ventures China, Shanghai-based Delta Capital, and social media and gaming giant Tencent, among others, also participated in the round.
• The proceeds of the round will be used to scale Enflame’s business, expand its tech support team, fund research and development, and mass produce its products, the company said.
• Enflame provides products for training cloud-based artificial intelligence platforms, including training and inference chips.
• In December, the company launched an AI accelerator for data centers dubbed Cloudblazer T10. The company said the product provides energy-efficient data processing capabilities for cloud-based AI training platforms.

Context: Enflame is not the only company aiming to improve data center performance. In September, e-commerce giant Alibaba unveiled a self-developed AI chip that was being used to optimize product search and automatic translations on the company’s e-commerce sites.

• Despite being seen as an area in which China can take the lead globally, the country currently lags the US in its development of AI chips and is vulnerable to political actions by US lawmakers, including trade restrictions.

China has released new rules requiring companies buying networking products and services to perform cybersecurity evaluations for vulnerabilities that could affect national security.

Why it matters: China has been imposing stricter controls over the technology that makes up the backbone of its internet and how people interact in the cyber world.

• In 2017, China implemented its landmark Cybersecurity Law, which has served as a framework for regulations that have been rolled out since.
• The law set standards for the governance of the country’s internet, including rules over real-name verification, content moderation, and data localization.
• The new rules clarify procurement review requirements and procedures to comply with existing laws.

Details: Operators of “critical information infrastructure” are required to conduct reviews of networking equipment and services to address any national security concerns, China’s internet watchdog said this week (in Chinese).

• The rules could affect purchases of server equipment, mass storage devices, cloud computing services, and large-scale databases, among others.
• There is no clear definition of which companies could be classified as critical information infrastructure operators, though they broadly include firms involved in the finance, energy, transportation, and telecommunications industries, or those that handle large amounts of personal data.
• Operators are required to make “anticipatory judgments” over whether the use of the equipment could pose a threat to national security.
• If risks are found, operators will be required to submit a cybersecurity review application to the government.
• A new government office will be set up to conduct evaluations to determine whether the equipment can be interfered with or illegally controlled, whether the systems could jeopardize data security, or if there are risks of service outages.
• The new rules will be implemented beginning on June 1.

Context: Previous updates to China’s cybersecurity frameworks placed additional burdens on foreign companies and how they handle data collected from Chinese citizens.

• In 2018, Apple moved all of its Chinese user data to China through a partnership with a data center operator in the country’s southwestern Guizhou province.
• Cloud operators, including Microsoft Azure and Amazon Web Services, are required to offer their products through partnerships with Chinese companies.

A Chinese artificial intelligence firm has become the latest victim of Covid-19 cyberattacks, as hackers look to profit off stolen medical data and research in the midst of the pandemic.

Why it matters: The outbreak has led to a surge in illicit cyber activity, with hackers targeting individuals, companies, and governments.

• Korean and Vietnamese hackers have launched cyberattacks against China and its government in what appears to be an effort to gain intelligence to guide their own Covid-19 responses.
• Targeted attacks through coronavirus-themed emails have increased 667% worldwide, according to US-based security firm Baracuda.

Details: Huiying Medical, a Beijing-based company developing AI-based tools to diagnose Covid-19 infections, had its source code and experimental data stolen, researchers from US-based cybersecurity company Cyble said over the weekend.

• “Credible threat actor THE0TIME” claims to have breached Huiying’s systems and is selling the data on the dark web for 4 BTC (around $30,800), the researchers said.
• The dump includes user data, source code, and Covid-19 experiment information.
• Using images from CT scans, Huiying’s AI system gives healthcare workers a probability that a patient is infected with Covid-19.
• Huiying has cooperated with 800 hospitals around China, including Peking Union Medical College Hospital, Chinese media Leiphone reported.
• Huiying has partnered with smartphone and telecommunications giant Huawei to provide two hospitals in Ecuador with AI-based diagnosis tools for Covid-19, state media reported.

Context: Hackers have capitalized on growing Covid-19 fears around the world as a means to get their hands on sensitive corporate information and personal data.

• Chinese cybersecurity company Qihoo 360 said in February that South Asian attackers used coronavirus-themed emails as bait to launch attacks on organizations “on the frontline” of fighting the outbreak in China.
• Cyble previously found 500,000 Zoom accounts for sale on hacker forums and the dark web. Earlier this month, the researchers also identified a trove of nearly 270 million Facebook accounts up for sale for €500 (around $540).

Chinese facial recognition firm Megvii is reportedly considering a listing on Shanghai’s Nasdaq-like Star Market in order to make the most of favorable policies at home.

Why it matters: Megvii was initially planning a Hong Kong IPO but the company’s inclusion on the US’ so-called Entity List and the coronavirus outbreak have presented significant roadblocks.

• Megvii has been widely expected to become China’s first listed AI startup. The company’s IPO application to the Hong Kong Stock Exchange lapsed in February, even though it had three months to renew it.
• The Shanghai Star Market, launched in June last year, allows unprofitable companies in high tech industries to apply for a listing.

Read more: New STAR Market could lure domestic tech firms from Hong Kong IPO

Details: Despite considering a listing in Shanghai, neither Megvii nor its shareholders are in a rush to go public, one of the sources told SCMP.

• The company is exploring its options and it could still reapply for a Hong Kong IPO, according to the report.
• Meanwhile, Shanghai’s government is seeking to attract high-tech companies by helping them to obtain financing, fast-tracking their IPO applications, and granting them tax incentives—attractive proposition given the difficult first quarter in China.

After taking a significant hit following the nationwide Covid-19 lockdown, electric vehicle (EV) sales in the world’s biggest market are finally showing signs of recovery.

In February, according to figures from the China Passenger Car Association (CPCA), new energy vehicle (NEV) sales plunged 77% year-on-year to a mere 11,000 vehicles—the lowest since January 2017, when Beijing began phasing out subsidies on electric vehicle purchases.

China’s biggest automakers have been the hardest hit by the virus. In March, the country’s NEV giants—BYD, BAIC, and Geely—saw their deliveries plummet by two-thirds year-on-year. This marked three consecutive months of decline, in which the automakers saw their deliveries fall by more than half.

Covid-19 had effectively crippled China’s mobility industry. In February, as lockdowns to contain the disease spread across China, the need for transportation services disappeared. Taxi and ride-hailing services—usually cash cows for China’s biggest OEMs—came to a standstill due to weak demand and poor revenue, the CPCA wrote in a March report (in Chinese).

BYD, BJEV, and Geely are the largest players in China’s business EV market. Not only do they supply EVs for mobility services in their home cities, but their vehicles are also deployed in countless cities nationwide as local governments electrify their taxi fleets.

Last year, BAIC reportedly received orders for more than 80,000 EVs from various ride-hailing services, while Geely inked a deal with Chengdu to replace the city’s fleet of 10,000 gas-powered taxis with EVs by the end of 2020. But the economic pressures faced by ride-hailing operators during the outbreak resulted in a “significant number” of new car orders being canceled, said Cui Dongshu, secretary-general of CPCA, on April 9. As infection rates climbed, electrification of these fleets became a low priority. Now, as more than 50 cities resume taxi services after a month-long suspension, China’s auto giants remain in the doldrums. 

EV startups taking the lead

However, there have been a few winners. Chinese EV darling Nio and the American carmaker Tesla have bucked the trend.

The US EV giant recently reported record-high first-quarter results but did not disclose figures for sales in China. However, according to figures obtained by CPCA, the company delivered 10,160 EVs in China last month. That figure made up over 20% of the country’s all-electric market, and Tesla trailed BYD—one of China’s biggest automakers—by just a few dozen deliveries.

Late last month, Tesla’s Shanghai Gigafactory achieved weekly production capacity of 3,000 Model 3s, and is poised to offload around 150,000 China-made EVs this year.

Nio, which has faced its share of struggles, also outperformed the country’s biggest manufacturers over the past three months. During the first two months of 2020, combined sales of its flagship ES8 SUV and smaller ES6 only decreased around 12% from a year earlier.

The fall was followed in March by a 12% year-on-year increase in deliveries to 1,533 vehicles. “All signs point to a much faster demand recovery in the premium segment versus mass,” Bernstein analysts led by Robin Zhu wrote in a research note on April 8.

This appears to explain Nio’s relatively strong performance in the crumbling market over the past few months. The company has beaten the giants in the Chinese luxury EV sector. Over the past year, sales of its ES6 came out ahead of Mercedes Benz’s EQC and Audi’s e-tron in China, according to official car registration data.

However, Tesla now poses a bigger threat. The China-made Model 3 and Y could take market share from Nio, preventing the Chinese EV maker from improving earnings, analysts at China’s Everbright Securities said in March.

Nio aims to sell 4,000 cars a month this year, which the company says could “basically support its operational targets,” including a double-digit profit margin in the fourth quarter. Bernstein analysts predict Nio sales will rebound in the second quarter as the pandemic fades. “But the threat of competition from Tesla will only become more pertinent over time,” they said.

Beijing’s bailout

The turnaround for smaller EV makers can be attributed in part to China’s push to revive its flagging EV sector.

Before the coronavirus outbreak, Beijing had already been fighting to keep its electric vehicle industry afloat. The sector had gone into drastic decline since June of last year, when authorities cut subsidies by up to 50% for EV purchases. The hope was that reductions would spur innovation in a sector many believed had become too reliant on government support.

But in early January, China’s industry minister said the country would suspend further subsidy reductions in order to counter the months-long slump. The announcement came 10 days before China’s economy was turned upside down by wide-ranging quarantines and stay-at-home orders to curb the spread of Covid-19. As infection rates soared, authorities shuttered production plants and closed brick-and-mortar stores. Although February is typically a slow month for China’s auto industry, the shutdowns led to an unprecedented decline in deliveries.

Beijing is now leading a sector-wide bailout of its EV industry by backtracking on plans to completely axe subsidies this year as well as lowering barriers to entry for new EV makers. The government hopes to restore growth in the world’s largest market for electrified transportation in an offensive that, at this stage, seems to be working.

As China moves closer to something resembling normalcy following the drastic disruption to the economy, the State Council, China’s cabinet, made a surprise announcement: Subsidies and tax breaks for EV buyers will remain in place until 2022. The government had originally planned to do away with them completely this year.

The communiqué, which came just two and a half months after regulators decided that no further cuts would be implemented in 2020, represent a dramatic shift in direction. After NEV deliveries slid by nearly 80% in February, authorities ultimately decided to take matters into their own hands instead of allowing the industry to stand on its own two feet.

Beyond subsidies

Postponing further subsidy cuts represents just one of the ways that Chinese authorities are attempting to restore the industry to its former glory and rescue automakers that have been deeply affected by the virus.

The country’s notorious production quota system is also reportedly being temporarily relaxed. The system has been used to drive EV production by requiring domestic automakers to follow strict guidelines on reaching EV building goals.

Bigger automakers—which have been some of the hardest hit in the past three months—may now be allowed to focus on better-selling gas-driven cars and to delay new EV launches in order to improve their dwindling cash reserves.

Local governments are also helping to bail out troubled automakers with massive cash injections. Nio has signed a deal with the government of Hefei, the capital of east China’s Anhui province, worth RMB 10 billion (around $1.4 billion). The long-awaited deal is expected to rescue the company from a liquidity crunch after months of no investment.

Meanwhile, the government of Henan province invested RMB 2.02 billion for a 60% stake in Shanghai-based EV maker Reech Auto. Although the company has yet to start producing vehicles, they have struck a deal with state-owned carmaker Changan to produce its vehicles.

Beijing is also making it easier for fledgling automakers to enter the market by lowering barriers to entry. The government will no longer insist that EV makers be capable of product development, according to draft changes to current policies released on April 7 by the Ministry of Industry and Information Technology. The measures had previously been put in place to calm a regulatory bubble that had seen nearly 500 EV companies established throughout China.

Search giant Baidu has accused a former executive of corruption and handed the case over to the police, the company said on Tuesday.

Why it matters: An increasing number of Chinese firms have launched anti-graft initiatives that mimic the Chinese state’s approach to dealing with misconduct.

• Since 2013, Chinese president Xi Jinping has led a far-reaching campaign against corruption, targeting members of the government and corporate figures.
• Apart from Baidu, companies including lifestyle services giant Meituan, dronemaker DJI, e-commerce company JD, and ride-hailing firm Didi have sought to weed out corruption.

Read more: Even global tech darling DJI is not immune to culture of corruption

Details: Baidu’s Professional Ethics Committee said Fang Wei, a former vice-president at the company, is suspected of corruption following an internal investigation and has been handed over to the police.

• Wei served as a director of finance at the company until he was promoted to vice president of finance in 2018. He has also held supervisory roles at more than a dozen Baidu companies.
• Baidu’s ethics committee did provide details about Wei’s alleged offenses.
• The company said it will crack down on any behavior that violates the law or infringes upon professional ethics.
• Baidu dismissed 14 employees in August that were allegedly involved in 12 cases of internal corruption. The company accused those involved of bribery, infringing on trade secrets, fabricating expenses for reimbursements.
• Like most companies, Baidu has stepped up its anti-graft campaign in recent years. The search giant set up its ethics committee in 2011 and has since investigated more than 100 employees.

Context: Anti-corruption campaigns are common among China’s tech companies but some take more drastic steps than others.

• E-commerce giant JD.com sent some of its employees on prison tours to view firsthand the cost of corruption. These tours are common in state-owned enterprises or financial institutions, not tech companies.
• Meanwhile, drone-maker DJI said last year that it was investigating 45 employees for graft, adding that the company could lose up to $150 million as a result of internal fraud.
• E-commerce giant Alibaba, smartphone maker Xiaomi, gaming and social media giant Tencent, and telecommunications firm Huawei have all launched similar campaigns.

Chinese automakers are looking for novel ways to reach customers as people in China shy away from going outdoors.

To curb the spread of Covid-19, the new flu-like virus that has rocked the country over the past few weeks, cities across the country have imposed strict rules limiting people’s movement. The epidemic has had a profound impact on China’s auto sector, with numerous manufacturers repeatedly postponing the reopening of their production facilities. Just one-third of Chinese automakers have resumed production, the China Association of Automobile Manufacturers (CAAM) said on Feb. 13.

The move originated with Nio Houses, the company’s exclusive clubhouses for customers in its flagship stores. Prior to the Covid-19 outbreak, Nio owners had organized events and made connections in these spaces, which are equipped with a co-working space, a café, and even a childcare center.

In an online network that is not subject to the restrictions of space, Nio is not only trying to draw the attention of customers with different interests and backgrounds, but also fulfilling an ambitious goal: building connections with its community using a customer-centric strategy. Nio’s customer loyalty is the company’s strength, and it is playing to that strength to solidify its reputation.

Tesla: A latecomer in online engagement

Nio is not alone in its online crusade. Tesla has also taken to short videos and live-streaming in China, but unlike its competitor, the American EV maker has suffered from poor planning and unprofessional hosts.

On Feb. 8, just one day after Nio launched its revitalized online marketing campaign, two Tesla stores in the Pudong area of Shanghai opened accounts on Douyin. Tesla stores in other Chinese cities have also set up Douyin accounts.

In comparison to Nio, Tesla’s official Douyin account consistently posts swanky, yet less focused, content that ranges from videos of the Cybertruck and Roadstar 2 to goofy skits. The company’s default policy has been to let its local stores determine what content they post. Tesla has yet to designate a person to develop a central content strategy, two Tesla salespeople said when contacted by TechNode last week.

In one of these livestreams, a young Tesla employee used the last 15 minutes of the show to make small talk with his dozen viewers. These conversations included urging a customer to take out a loan on a new car, adding that a RMB 40,000 (about $5,700) down payment on a car was “quite cheap.” The host went on to make fun of his own hair, saying that he was unhappy with the wavy hairstyle and complaining that salons have remained closed because of the outbreak.

In another livestream, a salesperson wearing a facemask walked around a Model X in a Tesla store, providing detailed information about the car. A female assistant took the camera and occasionally asked questions sent by viewers. The sales supervisor was knowledgeable about EVs and careful in the choice of his words. Faced with a hardball question about the car’s wind noise, he acknowledged that the Model X’s fastback roof and frameless doors make wind noise reduction more challenging than for other cars. However, the distracting spectacle of several employees goofing off nearby spoiled the professionalism of the video. During the 20 minutes that TechNode viewed this livestream, fewer than 10 viewers were watching the show.

One possible explanation for Tesla’s less-focused content is less need—sales have been good since the company began accepting orders for its Chinese-made Model 3. Meanwhile, Nio has warned that it expects deliveries to drop off in February.

Unclear results

EV makers in China have always taken an internet-first approach to their businesses. But the recent virus outbreak has made this modus operandi a matter of necessity rather than just convenience.

As the government has encouraged—and constrained—people to stay indoors, the entire process of buying a car has moved online. Many EV companies are providing “online showrooms” via live-streaming, where potential buyers ask questions and interact with the host just as they would in a physical space.

Interested individuals can book a door-to-door test drive, in which the company brings the car to them and takes them back home after the drive. And if they decide to buy that electric vehicle, they can order and pay online, and have the car delivered directly to them.

A Tesla salesperson in Shanghai told TechNode that if the deposit for a China-made Model 3 is paid now, a test drive can be arranged for March. If the customer feels the vehicle isn’t up to standard, the deposit will be returned.

However, the process relies on piquing the interest of customers, and so far, live-streaming has had mixed results for EV makers.

According to TechNode’s investigation, vehicle-related live-streams do well in audience terms, often drawing more than 100 viewers per show. One Nio video detailing the company’s self-driving capabilities attracted more than 1,000 viewers. However, the company’s lifestyle livestreams typically get many fewer views.

“Everyone cares more about hardcore content,” an EV fan in Xiamen told TechNode, referring to videos about actual cars rather than other topics.

The diverse types of content are directed at different audiences: those who are interested in buying cars and those who are already part of the EV community. Nio in particular is clearly attempting to expand its Nio House concept to the online space by providing non-vehicle-related services and content.

Nevertheless, numerous viewers appear to be less than impressed with some of the livestreams, describing the live shows as “boring” and lacking in informative content. Given that these livestreams have yet to garner many viewers, it’s unclear how successful the format may be in converting viewers to buyers.

If EV live-streaming gains a widespread following, it could potentially allow companies to scale back their presence in brick-and-mortar stores, dramatically reducing overhead.

For now, however, this avenue of sales is all that EV companies really have, as many city governments have enforced temporary closures of nonessential stores to stop the spread of the virus.

“Offline channels are basically blocked,” said a user on microblogging platform Weibo. “Now only those online can be used.”

Alibaba Cloud, a subsidiary of Chinese e-commerce giant Alibaba, will spend RMB 200 billion ($28.27 billion) on its cloud infrastructure over the next three years following an increase in demand for digital services in the aftermath of the Covid-19 outbreak in China.

Why it matters: Alibaba’s cloud revenue grew 62% in the quarter ended December 2019 compared with the same quarter a year earlier, the company said in February.

• The Covid-19 pandemic has resulted in extra demand for digital services, which are typically reliant on cloud computing services and data centers to function.
• Alibaba Cloud is the largest provider of cloud computing services in China, but falls behind Amazon and Microsoft globally.

Details: Alibaba’s investment will focus on operating system and chip development, as well as on its network of data centers, where the technologies will be deployed.

• Alibaba has seen a marked increase in the use of its technology since the beginning of the year. As many businesses requested that their employees work from home to reduce the risk of coronavirus infections, companies across China relied more heavily on tools like Dingtalk, Alibaba’s enterprise communications app.
• Dingtalk also provided a platform for online learning after schools and universities were closed due to the outbreak.
• Meanwhile, the company helped the Chinese government roll out a health passport system, a digital quarantine measure that assigned users a red, yellow, or green rating based on their health status and travel history.
• “The Covid-19 pandemic has posed additional stress on the overall economy across sectors, but it also steers us to put more focus on the digital economy,” Jeff Zhang, president of Alibaba Cloud Intelligence, said in a statement on Monday.

Context: Alibaba has increased its focus on cloud computing over the past two years, seeing the business as a major driver of growth.

• Daniel Zhang, Alibaba’s CEO, said previously in an interview with CNBC that cloud computing could become the e-commerce giant’s “main business.”

Beijing is promising big spending on “new infrastructure” amid post-virus stimulus. The government says it will focus on electric vehicle (EV) charging infrastructure, an upgraded electrical grid, artificial intelligence, 5G networks, improved transportation systems, and data centers to drive the economy towards recovery. 

While China has not announced official figures, analysts from China Sinolink Securities, which has produced the most comprehensive and widely cited estimates, expect the total to reach RMB 1 trillion (around $141.3 billion) in 2020. 

Bottom line: Don’t count on high-tech infrastructure to overcome a recession—it’s outweighed by traditional projects. But this investment gusher is accelerating deployment of technologies like connected roads, improved telecommunications networks, and electric vehicle charging stations. 

A familiar remedy: China has typically turned to infrastructure spending in the face of economic troubles. During the 1998 Asian Financial Crisis, the government issued billions of yuan in treasury bonds to increase investment in roads, utilities, railways, and telecommunications. 

• Ten years later, during the 2008 financial crisis, authorities took a similar approach, this time spending trillions of yuan as economies around the world faltered in the aftermath of the crash. 
• “How best to balance the epidemic’s negative impact on the economic downturn? The simplest and most effective way is to develop infrastructure,” Ren Zeping, chief economist of Evergrande Research Institute, wrote in a March 3 article.
• Local governments jump on buzzword policies like “new infrastructure,” with strange results. Some provinces have made implausible claims that they are spending upwards of RMB 3.6 trillion on “new infrastructure” in a single province, Southern Weekly (in Chinese) reports.

Connected roads

Expected investment: RMB 450 billion

Apart from traditional road infrastructure projects, China is looking to build intelligent transport systems that incorporate technologies such as 5G, artificial intelligence, and the Internet of Things. While Beijing has not outlined a budget for connected roads, Sinolink expects (in Chinese) the government to spend nearly RMB 450 billion on supporting technologies.

• Sinolink expects sales in the connected vehicle market to exceed RMB 100 billion this year, up by 70% from last year, given Beijing’s support for its new infrastructure project. 
• The boost in spending comes as the world realizes that commercial-scale fully autonomous vehicles may not be arriving anytime soon, driving the focus from smart cars to smart roads. 
• China is implementing “vehicle to everything” (V2X) systems, intended to allow vehicles, roads, and pedestrians to “talk” to one another, around the country.
• China’s approach relies on cellular networks, dovetailing with the country’s focus on 5G.
• For self-driving cars, the V2X could outsource vision and detection of other road users to the roads themselves, allowing for far greater visibility than if sensors were only put on cars. 
• Using fast 5G connections in the age of 5G, the framework could potentially allow for decision- making to be done centrally, instead of by autonomous vehicles themselves.

Read more: China’s AV edge? It’s the infrastructure

Baidu does well: China’s search giant Baidu has become a major beneficiary of China’s recent drive to increase spending on new infrastructure projects that incorporate these sorts of technologies.

• The company has this year won contracts to build V2X pilot zones in the southwestern Chinese city of Chongqing, central China’s Yanquan, and Hefei, a city in eastern China. 
• As part of these projects, Baidu will install road sensors, edge computing servers, and cloud-based control platforms for V2X and autonomous vehicles. 

A head start in a race to set standards: Early mass implementation of China’s standards for C-V2X could lead to wider adoption around the world, and more money for Chinese companies, as deliberation over opposing systems grows. 

• While China is adopting a cellular approach to smart road infrastructure, places like the EU have developed V2X standards based on Wi-Fi. 
• The debate over which standards to adopt has the telecoms and auto industry divided.  The outcome could decide which continent ends up leading in autonomous driving. 
• EU regulators are backing the WiFi standard, gaining support from automakers such as VW, Toyota, and Renault, as well as chipmaker NXP. 
• Broader adoption of the China-backed cellular standard is of strategic importance for the country, as the world’s biggest 5G equipment makers, including Huawei, are Chinese. If the world goes with wifi, they’ll miss out on lucrative projects.

5G networks

Expected investment: RMB 300 billion

The official cliché is that 5G is the “highway of the information age.” The next-generation wireless network is also seen by state media (in Chinese) as the “bellwether” for the seven key areas of the new infrastructure projects. 

• While Beijing has broad ambitions to be a global 5G leader, the current priority on its agenda is to build more 5G towers. 
• Sinolink expects total investment by local governments and telecoms companies into 5G base stations to reach RMB 300 billion this year.
• China Mobile, the world’s biggest telecoms operator by subscribers, has announced  a plan to install 300,000 5G cell towers this year. 
• The other two, China Unicom and China Telecom, have teamed up to build one 5G network expected to have 250,000 new base stations by the end of September.
• The three carriers’ combined budget for 5G buildout in 2020 is RMB 180.3 billion, according to state-run China News Service.

Some are more equal: While Beijing has repeatedly said that foreign companies have “equal opportunities” to participate in the rollout of its 5G networks, most of the budget will probably go to domestic vendors such as Huawei and ZTE.

• In China Mobile’s latest tender for the buildout of the majority of its targeted 5G base stations this year, Huawei and ZTE were awarded a combined share of 85.9% of the contract, by the number of base stations. 
• Swedish telecoms gear maker Ericsson, the only foreign company granted a tender, took only an 11.4% share. 
• Finnish company Nokia, another major Huawei rival, got none.

EV charging stations

Expected investment: RMB 10 billion

At the heart of the national policies for global leadership in technology, electric vehicles were not left out of the big funding boost. Beijing has announced plans to spend RMB 10 billion on the country’s scattered charging network in a bid to increase EV uptake.

• The National Development and Reform Commission, China’s top economic planner earlier this month revealed an RMB 10 billion initiative to build a combined 600,000 public and private charging piles across the country this year, a 50% increase from the current network. 
• State-owned power utility monopoly State Grid responded immediately with the announcement of an RMB 2.7 billion construction plan of charging facilities in more than 24 provinces and cities this year. So was China Southern Power Grid which pledged to spend RMB 25.1 billion to build 380,000 charging piles over the next four years.
• This marks the first time the central government directly supports a countrywide expansion in charging networks. 
• China poured a staggering more than RMB 400 billion in electric vehicles over the ten years to 2018, according to estimates from think tank Center for Strategic and International Studies and official statistics. However, much of the spending was to subsidize EV purchases, while localities were left to plan on their own for charging buildout.

Much needed: A charging station buildout could help the struggling EV industry draw in customers.

• Inadequate access has been among the top barriers to EV purchase by customers for years, according to McKinsey & Company, which echoes “range anxiety,” a common fear among EV owners of their cars running out of power before finishing the duty.
• China published an ambitious plan in 2015 to build 4.8 million charging piles across the country by 2020, but later downgraded it after falling short. 
• Only 25% of that number are so far built, according to figures from China Electric Vehicle Charging Infrastructure Promotion Alliance (CEVCIPA).
• Now the buildout seems to be back in earnest. Charging and swapping infrastructure are the “key foundation” (our translation) for new energy vehicle development, Xin Guobin, a deputy head of China’s IT Ministry earlier this week.

A tough business: Charging infrastructure could use the help—experts warn that it’s hard for companies to succeed with it in market terms.

• Chinese charging operators have mostly been lossmaking due to single-digit utilization rates, and it was until 2018 that TGood, China’s top charging service platform broke even, wrote Ren Zeping, chief economist at the Evergrande Group in a report (in Chinese) earlier this month.
• It normally takes investors six to ten years to recover costs for charging infrastructure, and therefore investment without careful planning is “not recommended,” Chinese media Caixin reported citing Zhang Fan, director at CEVCIPA.

A big boost to the economy?

Unprecedented support from Beijing could drive a surge of capital flow into technology sectors, however, the impact to shore up the entire economy might be limited.

• Investments on new infrastructure only account for 10% at most in some local government funding plans this year, “not a pillar” to sustain a new round of economic growth, said Liu Shijin, former deputy director at the Development Research Center of the State Council at a conference last month (in Chinese).
• The impact from the renewed focus on new infrastructure should not be overestimated, wrote analysts at investment bank Guotai Junan. Local government spending plans will focus on airports, railways, roads, and urban utilities, they predicted.
• Also, China has long been criticized for significant waste and fraud in government spending, in light of years’ scandal in the country’s electric vehicle industry where local enterprises defrauded government money with various means to cook up figures. “We must choose investment projects well…. and also try to stimulate enthusiasm for private investment,” said Xi Jinping in a Politburo meeting early last month.

Luckin Coffee is one of nearly 20 companies that could have its app removed from app stores. All 20 were called out by the Chinese government for violating privacy protection rules.

Why it matters: The embattled coffee giant admitted earlier this month that several of its employees, including its management team, fabricated sales for much of 2019, with the fake transactions amounting to around RMB 2.2 billion ($312 million).

• The Nasdaq-listed company’s share price plummeted by more than 75% shortly after the disclosure.
• China’s regulators have been cracking down on how companies collect consumers’ personal data.
• Regulators announced in December that work on new security and personal information protection laws would begin this year.

Details: China’s National Computer Virus Emergency Response Center (CVERC) said on Friday that a version of Luckin’s mobile app, along with applications from Pizza Hut, Yonghui Superstores, grocery delivery platform Meicai, and Pingan Good Doctor had violated rules governing data collection.

• The CVERC found that Luckin and the majority of the other apps did not state clearly to users how they would use their data or didn’t provide effective measures allowing users to correct or delete personal information, or to close their accounts.
• Other companies also found to be in violation of the rules include online healthcare providers More Health and Haodaifu, and online education platform Kehou, among others.
• The CVERC said it would issue a notice to have the apps removed.
• TechNode found that on Monday that Luckin’s app could still be downloaded from Chinese Android app stores as well as Apple’s China App Store.

Context: China has led a crackdown on app developers that don’t adhere to regulations governing data collection.

• Some of China’s biggest tech companies have fond themselves caught up in the offensive.
• In December, Tencent, Xiaomi, and Sina Weibo were all found to “illegally collect and use personal data, excessively request user authorization, or create unnecessary hurdles for unsubscribing users.”
• The CVERC falls under the State Council, China’s cabinet. It was initially established by the Tianjin Public Security Bureau in 1996 and is responsible for detecting and monitoring virus outbreaks in China.

Chinese AI startups have raised at least $420 million this month, defying a steep drop in fundraising in China’s tech sector amid the Covid-19 pandemic.

Why it matters: China’s AI firms have grown off the back the government’s drive to become a leader in the technology by 2020 but haven’t been immune to the outbreak of the flu-like virus.

• Nearly all facial recognition startups in China work with the country’s public security bureaus, which can be lucrative given authorities’ emphasis on domestic stability.
• Nevertheless, these contracts have taken a significant hit during the first quarter.

Details: Speech recognition firm AISpeech, AI chipmaker Intellifusion, and machine learning firm 4Paradigm have collectively raised $429 million since the beginning of April.

• 4Paradigm, which specializes in providing machine learning solutions to enterprises, announced on April 2 it had raised $230 million at a valuation of $2 billion.
• Days later, Intellifusion said it had completed a pre-IPO round worth RMB 1 billion ($141.4 million) to fund R & D of its algorithms and chips, among others.
• On Tuesday, speech recognition and analysis startup AISpeech announced its Series C, raising RMB 410 million.
• The investments come after a difficult first quarter. Venture capital funding in China’s tech sector during the first quarter totaled RMB119.1 billion, down more than 30% year on year from RMB 173.6 billion, according to a recent report (in Chinese) by Itjuzi.com. The number of VC deals in the sector fell to 634 from 1,143 during the same period.

Context: Despite signs of a recovery in investor sentiment, the Covid-19 outbreak will likely have a significant impact on China’a AI firms, and the tech sector as a whole.

• In a bid to slow the spread of the virus, Beijing in late-January extended the Spring Festival holiday by more than a week. Even after the extension, many businesses in China allowed their employees to work from home.
• China’s AI companies will likely take a significant battering after the first quarter as their customers, including the government, tighten their belts after a difficult start to the year.

Baidu’s Apollo autonomous driving program has thrust the search giant into the spotlight. Named after NASA’s moon missions, the self-driving program recently enjoyed a series of wins when Baidu came out on top in annual self-driving reports released by authorities in California and Beijing.

Waymo has said the reports do not provide “relevant insights” or distinguish their company’s “performance from others in the self-driving space.” Kyle Vogt, the CTO of General Motors-backed Cruise, shared similar sentiments. “The idea that disengagements give a meaningful signal about whether an AV is ready for commercial deployment is a myth,” he wrote in a blog post.

Still, much is expected of Baidu’s self-driving efforts. The company has launched autonomous ride-hailing services in Changsha, the capital of Hunan province, as well as in Cangzhou, in north China’s Hebei province, with a fleet of 30 cars. Baidu’s autonomous driving tests have covered more than 3 million kilometers on public roads across 23 Chinese cities.

Where are Baidu’s self-driving cars headed in 2020? What is the outlook for Baidu in autonomous ride-hailing? We will start with our recent experience in a Baidu robotaxi in Changsha and move on from there.

A ride in a Baidu robotaxi

Robotaxis are all the rage. Around the world, startup and tech giants alike are fighting the war for self-driving supremacy, and autonomous taxis have become the new battleground.

Companies including Baidu, Pony.ai, and WeRide have launched robotaxi pilots across China. Baidu, the country’s designated self-driving champion, began offering its robotaxi service in Changsha last September.

Three months later, TechNode arrived in downtown Changsha. Standing outside a well-known culture and arts center on a sun-washed December afternoon, we waited for a Baidu self-driving taxi to pull up.

The trip showed us how companies are taking vastly different approaches to developing their self-driving technologies, and just how difficult it is to create global benchmarks detailing how these vehicles should perform.

Baidu runs its autonomous taxis in and around Changsha’s downtown Xiangjiang New Area. The trial operation is more of a geo-fenced test on public roads; passengers can pick one of three fixed five-kilometer routes, all starting from the city’s grand theater.

The tech giant has partnered with Chinese state-owned automaker FAW Group, which provides the vehicle for its autonomous system. As the luxury Hongqi model arrived to pick us up on that balmy December afternoon, we quickly took one photo before we were told that pictures were not allowed.

Shortly after we got into the car and entered Changsha traffic, Baidu’s approach to its self-driving program became evident. It was like going for a ride with a nervous student driver.

Companies that develop self-driving technology need to consider not only the safety of their passengers but also the comfort of the ride. Baidu places more emphasis on safety than we had expected, resulting in a trip that was less smooth than AV rides we’d experienced from companies that squeeze more efforts to the comfort of their passengers.

“Our top priority is zero accidents on the road,” our vehicle’s safety driver said while we waited at a traffic light. He offered a glimpse into how the company’s safety precautions are meant to protect the trial project from any sort of controversy. “All of us are required to take a 10-minute break for each hour of work,” the driver told us.

During our trip, Baidu’s robotaxi traveled at speeds of around 30 kilometers per hour and stopped by itself every now and then to yield to pedestrians. Traffic was heavy, with cars filling the six-lane Meixi Lake Road, downtown Changsha’s main avenue.

When the vehicle stopped at a red light in the middle of an intersection, we got to see firsthand the safety precautions that our driver had described: After a few minutes of waiting, the human driver had to take over. Situations like these are typically evaluated as “too risky” for the autonomous system to navigate. Baidu says it has reported “zero accidents” in the past few years because of its “safety-first” approach.

The company has requested that its fleet of dozens of vehicles in Changsha log a certain amount of mileage each day, our safety driver told TechNode, without revealing any further details. Meanwhile, working hours are very limited since the company has not been allowed to test during rush hour. Therefore, overtime work during weekends has become common.

A conservative driving strategy

Baidu is taking a more conservative approach to its AV road testing, emphasizing safety over comfort, a self-driving car engineer said, commenting on TechNode’s observations of our robotaxi ride.

Slower driving speeds, hesitation when turning or changing lanes, and constant stops when facing dangerous scenarios are among the passive driving strategies that result, the engineer said, who asked not to be named because he was not permitted to speak to the media.

A focus on safety, alongside a goal of fewer human interventions, can be achieved by developing a cautious algorithm, helped by some of the high-performance hardware that acts as the eyes of self-driving vehicles.

For years, safety and comfort have been among the top priorities for robotaxi companies offering driverless experiences. “No doubt safety is the key to getting autonomous cars on the roads,” but a better solution could be a wider range of driving styles with safety guarantees to ensure more comfort for passengers, the engineer said. There should have been some “more decisive driving policies” he said, referring to how the vehicle could have taken proactive measures to avoid dangerous situations, such as changing lanes.

Key metrics on AV testing

Baidu’s prudence could be part of the reason the company came out on top in the recent self-driving report released by California’s Department of Motor Vehicles.

Baidu beat Google’s self-driving unit Waymo by reporting the least number of disengagements among all companies operating such vehicles in the state. A disengagement is defined as any time a human driver is required to take over from an autonomous system during self-driving tests.

But within the industry, questions over the relevance of such metrics are on the rise, with experts saying that the measure has limits when trying to gauge whether a company’s technologies are ready to be deployed commercially.

AV companies themselves have also highlighted the report’s limited usefulness. In an announcement, Baidu said disengagement is more of an internal reflection of the speed of technical iterations, and therefore comparison between companies is “not that meaningful.”

However, if disengagement rates offer few relevant insights into the technology, what are the measurable metrics that could indicate progress? Two experts that TechNode spoke with gave the same answer: the variety and complexity of testing scenarios in which a robocar can operate.

Keeping within a lane in urban traffic, recognizing traffic signals, or turning left at an intersection without a “green arrow” traffic signal are some of the most typical and frequently seen scenarios identified and tested by AV players.

However, the real difficulty is to get autonomous cars to operate under “edge cases,” or unusual circumstances, such as a nearby vehicle changing lanes abruptly, a motorcycle coming out of nowhere, or drunk driving behavior from other road users.

These scenarios could be used to create a benchmark dataset that enables companies to train and evaluate their algorithms and compare accuracy rates to effectively evaluate their technologies, much like ImageNet, a renowned computer vision dataset of more than 14 million photographs widely used to evaluate the performance of AI systems.

“The more driving scenarios your cars can handle, the more you can prove the safety of the technology,” said one of the experts. Nevertheless, problems persist because the industry has not reached a consensus on standards.

The self-driving industry has now evolved from being driven by research and development of AV technologies to being mostly pushed forward by testing efforts. The development of key technologies, such as environment perception and car control, have mostly been completed; the priority now is to gain experience in as many driving cases as possible and learn how to deal with them, the experts added.

Every new experience helps a self-driving car to learn, and that’s where some of the world’s AV leaders are ramping up their efforts. Last year, Cruise almost doubled its testing and validation miles from the year prior, and “every mile Cruise tested in California was driven in the very complex urban environment of San Francisco,” it said in its individual filing.

The company, which is mainly backed by General Motors, operates a fleet of 228 vehicles that drove more than 831,000 miles last year, nearly eight times that of Baidu. As of last December, the Chinese search giant claimed its vehicles had traveled a total of more than 3 million kilometers (1.86 million miles).

But wider tests in China are coming as more local governments join in the race to open their roads to robotaxi companies, allowing them to collect more data and develop better evaluation methods. We’ll have to wait and see who comes out in pole position.

Chinese cybersecurity experts claim Korean hackers have launched a wide-ranging hacking campaign against China’s government and its overseas diplomat missions, amid heightened coronavirus fears around the world.

Why it matters: Qihoo 360 speculated that the hackers, dubbed DarkHotel, may have been attempting to access information relating to the Covid-19 outbreak in China, including infection data and information relating to China’s recovery.

• While DarkHotel is believed to operate out of the Korean Peninsula, it is unclear whether they are from North or South Korea.
• The Covid-19 pandemic has forced millions around the world to work from home, typically making it easier for hackers to gain access to sensitive data.

Details: DarkHotel used a vulnerability in Chinese virtual private network (VPN) service Sangfor to attack China’s government agencies in around 20 countries, including the UK, Italy, and the United Arab Emirates, according to Chinese cybersecurity company Qihoo 360.

• Employees typically use VPNs to access corporate networks while working remotely. These services are used by both companies and governments.
• The hackers began targeting overseas Chinese agencies in March. The campaign has spread to include the governments of Shanghai and Beijing, according to Qihoo.
• The attackers used a previously unknown vulnerability in the VPN service to take control of diplomatic servers in the 19 countries.
• The cybersecurity company said that “many” devices that connect to these networks “have been under the control of the attackers.”
• Sangfor said it has been releasing patches for the vulnerability, and that they would all be available by Tuesday.

“Once VPNs are controlled by threat actors, the internal assets of many enterprises and institutions will be exposed to the public network, and the loss will be immeasurable.“

—Qihoo 360 researchers

Context: Hackers around the world have used the Covid-19 pandemic as a means to gain access to sensitive corporate and personal data.

• Qihoo said in February that South Asian attackers used coronavirus-themed emails as bait to launch attacks on organizations “on the frontline” of fighting the outbreak in China.
• Meanwhile, these sorts of Covid-19 attacks have increased 667% worldwide, according to US-based security firm Barracuda.

Chinese search firm Baidu is planning a $1 billion note offering to repay existing debts and fund general operations, the company said on Wednesday.

Why it matters: Baidu had a rough 2019 and expects flagging revenue in the first quarter of this year after the fallout from Covid-19, which has infected more than 940,000 people around the world.

• The company is reportedly eyeing a secondary listing in Hong Kong after completing an internal assessment earlier this year. Listings in the city during the first few months of 2020 dropped off dramatically compared to the same time last year.

Details: The offering consists of $600 million of 3.075% notes due in 2025 and $400 million of 3.425% notes due in 2030. They are expected to be listed on the Singapore stock exchange, Baidu said.

• The proceeds should reach $990 million, after deducting underwriting discounts and commissions, as well as offering expenses, according to the company.
• Goldman Sachs Asia and Bank of America Securities are joint bookrunners for the offering.
• Baidu has had a difficult first quarter and expects revenues to drop by up to 13% year on year after the novel coronavirus outbreak.
• “The Coronavirus situation in China is evolving, and business visibility is very limited,” the company said of its guidance in its fourth-quarter financial report.

Context: China is attempting to reach a semblance of normalcy after the country’s took unprecedented measures to control the spread of Covid-19.

• Companies around the country are now suffering from the fallout. Several of China’s biggest tech firms were reportedly seeking loans to soften the impact of the virus.
• Lifestyle services giant Meituan Dianping, ride-hailing platform Didi, smartphone maker Xiaomi, and cybersecurity firm Qihoo 360 are just some of the more than 300 companies seeking loans, Reuters reported.
• These companies were looking for between RMB 50 million ($7 million) and RMB 5 billion to deal with the effects of the virus.

Ride-hailing giant Didi has resumed limited nighttime operations of its carpooling service Hitch in some cities across China, while implementing stricter identity checks for drivers and passengers.

Why it matters: Didi suspended Hitch indefinitely in 2018 following two separate incidents in which drivers on the platform raped and murdered their female passengers.

• The murders sparked public outrage, prompting regulators to launch an industry-wide crackdown aimed at improving safety in the ride-hailing sector.
• Didi relaunched the service in November, though passengers could only hail rides between 5 a.m. and 8 p.m.

Details: Passengers in cities including Beijing, Shanghai, and Hangzhou will now be able to use Hitch until 11 p.m., Didi said in a post on microblogging platform Weibo on Friday.

• The late-night service comes with heightened safety measures, including more frequent identity checks, improved ability to detect route abnormalities, and more stringent trip recording requirements for drivers.
• Only passengers and drivers who have verified their identities on the platform, have not received any safety complaints in the past year, and have taken Didi’s nighttime safety exam will be permitted to use the late-night service, a Didi spokesperson told TechNode on Monday. For passengers, the exam takes the form of an online questionnaire.
• In November, the company relaunched Hitch in seven cities across China, including Beijing, eastern China’s Nantong and Changzhou, and the northern cities of Harbin and Taiyuan, among others.
• The reinstated service didn’t come without controversy. The service only allowed women to travel until 8 p.m., while for men the service extended to 11 p.m. Didi standardized the 8 p.m. cutoff for everyone following complaints that the gender-based hours were unfair.
• Hitch still appears to only be available for transport within urban areas. When requesting rides between cities in Didi’s app, TechNode found that the system said intercity trips are not currently available.

Context: China’s ride-hailing industry has faced compounding issues over the past two years. Apart from safety concerns, the Covid-19 outbreak as resulted in flagging demand since the beginning of the year.

• Didi removed more than 300,000 unqualified drivers from its platforms following the government crackdown on the industry in the wake of the murders.
• The company reportedly lost RMB 10.9 billion in 2018 as a result, as it sought to meet regulator demands and recruit drivers that met government requirements.

Robotruck startup TuSimple has partnered with German auto supplier ZF to develop and commercialize technology for autonomous trucks.

Why it matters: TuSimple aims to begin testing truly driverless trucks—those without safety personnel on board—by 2021.

• ZF is one of the largest automotive suppliers in the world and has made a significant push into autonomous driving.
• TuSimple has tested its technology on a stretch of highway between Tucson and Phoenix, Ariz. since 2018. The company also won China’s first permit to trial driverless trucks in Shanghai.

Details: TuSimple and ZF will work together to develop onboard computers and sensors such as radar and lidar for autonomous trucks, according to a statement released Thursday. The German supplier will also become TuSimple’s “default supplier” when commercializing robotrucks.

• ZF will provide engineering support to integrate and validate TuSimple’s autonomous driving platform into the trucks, the companies said.
• The partnership is an “important milestone,” according to Chuck Price, TuSimple’s chief product officer. He said that the deal allows the companies to scale the technology toward mass-produced autonomous trucks.
• Meanwhile, ZF said that it expects the two companies to create the first commercialized automotive-grade autonomous system for trucks.
• The deal comes shortly after TuSimple expanded a tie-up with UPS, effectively doubling the number of autonomous delivery runs the company makes for the American logistics company.
• TuSimple currently has 18 contracted customers and makes around 20 autonomous trips per day.

Context: Autonomous trucks are expected to reach commercialization before passenger vehicles, presenting huge potential for growth. TuSimple aims to transform America’s $800 billion trucking industry with autonomous rigs.

• The company was founded in the US in 2015 by Hou Xiaodi and splits its operations between the US and China, with offices in Beijing and Shanghai as well as in Japan.
• TuSimple, which is developing Level 4 autonomous long-haul trucks, secured $120 million in an extended Series D in September.

For the first time in history, a Chinese company has taken the top spot among firms testing autonomous vehicles on California public roads.

In 2019, Baidu drove 108,300 miles and reported six disengagements across its four vehicles, making for the lowest disengagement rate of all the companies listed in California’s annual report: 0.055 per 1,000 self-driven miles.

Baidu had drastically improved its performance over last year’s report, In 2018, the company reported one disengagement every 205 miles. This year, that number fell to one for every 18,050 miles. In doing so, the company managed to knock Waymo out of its top-ranked position. Baidu attributed the drop to rapid expansion in testing fields over the past three years. 

But as the industry matures, disengagements are increasingly being seen as a poor measure of performance, since road and weather conditions, which play a huge role in report results, are not included in the data. Meanwhile, Baidu’s reports contain significantly less information about disengagements than its peers, causing industry insiders to raise questions about the quality of the company’s tests.

Baidu’s human intervention

According to Baidu’s report, the company’s vehicles required human intervention in certain situations: when surrounding objects were not detected or were misclassified, when a decision made by the autonomous system was not appropriate to the scenario, or when there was a problem with the hardware.

However, Baidu does not provide any additional information about the situation under which these disengagements occurred, only broad categories. Meanwhile, several of its rivals’ reports provide more detail about each incident that resulted in a disengagement.

For example, where Chinese counterpart Pony.ai said of one disengagement: “Driver precautionarily intervened for a reckless neighboring vehicle cutting into vehicle’s lane,” Baidu would simply say “perception discrepancy,” making it difficult to gauge just how well the company’s AV system functions.

To be fair, self-driving startup WeRide also lacked detailed descriptions in its reports. These companies are not required to include comprehensive accounts of every disengagement. However, many well-established players do, including Cruise, Didi, and Zoox.

Other aspects of the company’s testing regime are also absent. The company does not mention in its report where the tests took place. Most other companies’ reports indicate where they are testing and whether they have expanded their operations in California.

Baidu is predominantly running its AVs in Sunnyvale in very simple traffic scenarios, two industry insiders told TechNode, who asked not to be named due to their proximity to the matter.

By contrast, General Motors-owned Cruise conducted all of its tests on urban roads in San Francisco, the third-most congested city in the US, according to Tomtom’s 2019 Traffic Index. Cruise reported a disengagement rate of 0.082 per 1000 miles.

A Baidu spokesperson told TechNode that the company tests in “diverse conditions,” including urban roads and scenarios involving pedestrian avoidance, left and right turns, lane changes, and traffic light recognition.

Road conditions can have a profound effect on disengagements, with more complex urban roads leading to more disengagements. Conversely, highway driving is typically seen as easy for AVs.

“If I wanted to look even better, I’d do a ton of easy freeway miles in California and do my real testing anywhere else,” Bryant Walker Smith, a self-driving car expert, told The Verge.

China’s major players

While Baidu took the top spot in the tests, four Chinese AV startups also made it into the Top 10. AutoX and Pony.ai came in fourth and fifth—right behind GM’s Cruise—with one disengagement every 10,684 and 6,475 miles, respectively.

Meanwhile, Didi Chuxing took the eighth position, reporting 1,535 miles per disengagement, a good result for a relative newcomer. Didi, China’s biggest ride-hailing platform, started testing in California in June 2018.

In addition, China- and California-based WeRide recorded 151.7 miles driven per disengagement, performing much worse than its Chinese peers but ranking higher than companies such as Apple, Mercedes Benz, and Toyota.

Most Chinese companies conducting tests in California revealed no further details about their operations when contacted by TechNode. However, their individual reports reveal a blurred glimpse into their performance.

Pony.ai, AutoX, and WeRide all claimed to have covered a big pool of testing scenarios in various traffic and weather conditions—either sunny days or heavy rain. However, none of them detailed when and where exactly a driver has to disengage the system. These companies gave no indication of whether these incidents occurred in downtown traffic during commutes or on empty highways at night.

In terms of test areas, all the four companies have vehicles being tested in the South Bay, while Pony.ai further expanded to Fremont, where it launched a pilot robotaxi program providing transport services from a train station to two government offices.

However, most of the areas have modest population density, around one-quarter of that of San Francisco, where GM Cruise tested its vehicles in the city’s “very complex urban environment.”

Among the four Chinese companies, Pony.ai reported that its vehicles covered the greatest distance. Its fleet of 22 vehicles logged 174,845 miles in California, the third-largest number in the ranking, although nearly a fifth of that of Cruise.

The Toyota-backed AV startup also detailed their disengagements in more detail than its Chinese counterparts. In the 27 disengagements recorded over the 12 months ending in November 2019, Pony.ai attributed eight of them to reckless driving by other vehicles, and 11 to suboptimal routes planned by software for the car to maneuver. The situations its vehicles encountered vary from insufficient yielding to reckless driving on the part of other road users.

A flawed system?

Other AV companies reported disengagements resulting from poor detection of road objects or mapping flaws in different traffic scenarios. Although such details were presented in Didi’s reports, the ride-hailing giant revealed few reasons for disengagements, not categorizing them as planning, mapping or control issues.

Alibaba-backed AutoX referred very generally to the company’s three human intervention cases as localization and planning problems. The low number of disengagements may result from fewer miles driven than other companies. Meanwhile, Nvidia-backed WeRide reduced its miles driven by nearly two-thirds in 2019 from the year before, making little progress compared to last year.

The furor over the reports has led an increasing number of experts in the field to call into question the effectiveness of using disengagements as a metric to gauge how a vehicle is able to drive autonomously.

Disengagement reports provide an opportunity to compare AV performance between companies but discrepancies in reporting make the metric insufficient to measure performance, experts say.

In a series of tweets last month, Waymo asked whether disengagement metrics lead to meaningful insights. The company added that most of its real-world driving experience comes from outside California.

Meanwhile, Cruise Co-founder Kyle Vogt shared similar views, saying in a blog post that the reports are “woefully inadequate” to judge whether an AV is ready to be deployed commercially.

An earlier version of this article quoted a TechNode source as saying that Baidu tests AVs on Bay Area interstate highways. In fact, the company denies that its vehicles have been tested on interstate highways, and a review of interview recordings suggested that we may have misunderstood our sources’ comments.

Artificial intelligence company Megvii has open-sourced its self-developed deep learning framework MegEngine, allowing developers around the world to use and improve on the platform.

Why it matters: China has set ambitious goals to be a leader in AI by 2030, but typically relies on US-origin open-source software from tech giants including Google and Facebook.

• The vast majority of Chinese AI companies turn to these frameworks when unable to develop their own. Self-developed systems such as these require massive investments in time and resources.
• Megvii is not the first Chinese company to open-source such a platform for wider use. Search giant Baidu released its self-developed deep learning framework PaddlePaddle in 2016.

Details: Megvii has published an early version of MegEngine, with a beta release expected in June and official launch in September, the company said on Wednesday.

• The framework was initially developed in 2014 as part of Megvii’s Brain++ architecture, which the company uses to train computer vision algorithms—software that allows computers to interpret what they see.
• MegEngine is especially effective when using large volumes of image or video data and can be used for complex tasks including image classification, object detection, and video analytics, according to Megvii.
• Open-source deep-learning frameworks allow anyone with a bit of coding knowledge to train machine-learning models for a variety of purposes without having to build them from the ground up.
• Open-source platforms benefit from people simultaneously using them, working to improve them, and reporting issues for other developers to address.

“We have used [MegEngine] to power our computational photography, facial recognition, and object recognition applications, but the developer community can use our foundational technology in innovative, real-world applications of AI that we have not yet imagined.”

—Sun Jian, chief scientist and head of Megvii Research

Context: China’s AI sector took a hit in October when the US placed eight Chinese companies on the so-called Entity list, effectively banning them from doing business with American firms.

• Megvii was included in the blacklisting. The company later said that its inclusion was due to a “misunderstanding of our company.” AI startup Sensetime, speech recognition firm iFlytek, and surveillance camera maker Hikvision, among others, were also included in the ban.
• Megvii is currently pursuing a listing in Hong Kong, which could make it China’s first AI startup to go public.

“In the era of big data and the internet, the flow of each person can be seen clearly,” epidemiologist Li Lanjuan told state broadcaster CCTV during an interview in February.

The renowned scientist compared China’s response to Covid-19 with its reaction to Severe Acute Respiratory Syndrome (SARS), alluding to technological developments that make it easier to track citizens.

“We should make full use of technologies such as these to find and contain the source of infection,” she said.

Epidemic control is a big data problem. Effective management requires officials to find out who has the disease, identify people they have met, and contain those affected to prevent further transmissions. The less the government knows, the more it has to restrict everyday life to stop the spread of disease.

In its fight with the virus, China is collecting unprecedented amounts of data to keep the highly transmissible virus under control. While these efforts were largely improvised during the first few weeks of the outbreak, the surveillance systems are now harvesting personal data with increasing efficiency. 

“It is clear that they are collecting very sensitive data, and that they are storing it in databases in several different places, all potentially vulnerable,” Lokman Tsui, assistant professor of journalism at the Chinese University of Hong Kong, told TechNode.

Even in the world’s most digital society, the flu-like virus ran rings around sophisticated surveillance systems. At the beginning of the outbreak, the heavy lifting was done by hand.

In Hubei, the province at the center of the epidemic, health authorities demanded that pharmacies and medical centers report the names, addresses, and ID numbers of people who bought fever and cough medicines after Jan. 20, three days before the province’s capital was locked down. The initiative was an effort to find unreported infections.

As transmissions around the country soared, and existing surveillance mechanisms proved ineffective, the state did the only thing it knew would work: cut off transportation routes and relegate people to their homes. 

On Jan. 23, the most extensive quarantine in history was put into effect. Residents of Wuhan, the city at the center of the outbreak, woke to the news that the metropolis of 11 million people had been locked down. No one was allowed out of the city. Trains and flights were canceled. Public transport was shut down.

The cordon sanitaire quickly expanded to include the whole of Hubei—a province of more than 50 million people. Zhejiang, on China’s east coast, later imposed similar measures, along with dozens of villages across the country. What travel was allowed was governed by paper administration. As the outbreak accelerated, officials required travelers to put pen to paper to detail their recent travel history and health status.

Cities around the country demanded residents returning home during the Lunar New Year holiday register their details with authorities in a bid to track down and isolate people who had been to Hubei. Meanwhile, train stations began handing out paper health declarations as millions made trips home to see their loved ones.

The system quickly showed holes. As the infection began to spread, so did panic. And people’s data became collateral damage. Hubei residents found their phone and ID numbers, home addresses, and travel itineraries circulating in chat groups on popular messaging app WeChat. Local officials appear to have leaked the data, and the information spread like wildfire.

Those affected took to social media to implore others to stop disseminating their data. “It is illegal to disclose personal information, which seriously violates our legal rights and threatens our personal safety,” one person said on microblogging platform Weibo.

But the damage was done, and people with a connection to Hubei quickly became pariahs in their communities. A number of the people affected by the leaks reported being harassed by phone and WeChat by unknown individuals demanding they “immediately isolate” themselves even if they had shown no symptoms after the 14-day incubation period.

Ten days later, China’s internet watchdog reiterated data collection rules: No using personal information collected to control the epidemic for other purposes. No collecting data from people who aren’t suspected of being infected or who have been diagnosed. No organizations other than those authorized by the National Health Commission were to use Covid-19 as a reason to collect personal data without permission.

After extending the Lunar New Year holiday by more than a week, officials wanted to get people back to work. They needed systems that could filter low and high-risk people. The first solutions used travel histories as a proxy for infection risk; most cities’ rules deemed people safe if they hadn’t moved around the county for two weeks.

China’s telecom providers stepped in, showing the extent to which they can track subscribers. China Mobile, China Telecom, and China Unicom all launched services on Feb. 13 that allow users to get a report of where they have traveled in the previous two weeks based on cell phone tracking.

Users could request an itinerary by SMS listing areas they had visited in the previous two weeks, giving them a way to prove to checkpoint guards they had not visited the worst-affected areas.

It’s unclear how widely and effectively these itineraries are used. When testing the feature shortly after it was rolled out, TechNode found that not all movements between cities were recorded. A correspondent who traveled between Shanghai, Beijing, and Shenzhen over two days found that China Mobile’s system recorded only Shanghai in their itinerary. 

Cities also outsourced their health surveillance efforts to employers. In Shanghai, where TechNode’s headquarters are based, the government required companies to collect health information from their employees daily. These firms need to store all their workers’ data. If someone is suspected of infection, their information is handed to authorities.

Meanwhile, residential communities began recording information from people arriving and leaving their premises while implementing temperature screening at their gates. Notices appeared on apartment doors requesting those who had been to Hubei report to local authorities and quarantine themselves for two weeks.

Cities also began implementing real-name registration to track the movement of people on local public transport systems. The system is typically used to link online accounts to individual identities, allowing actions to be digitized, categorized, and tracked.

With the help of China’s tech giants, several cities across the country, including southern China’s Shenzhen and the eastern Chinese city of Ningbo, rolled out platforms requiring commuters to register when using the subway, bus systems, and taxis. Passengers scan a QR code that logs their movements and allows the government to identify anyone who has come in contact with someone suspected of being infected.

But paperwork was still a big part of the system, with paper passes controlling access to apartment buildings.

Then, as lockdowns expanded, the eastern Chinese city of Hangzhou, 750 kilometers away from the center of the outbreak and home to Alibaba, began hatching a controversial new plan to digitize these passes and replace full-scale lockdowns with targeted quarantines.

Zhejiang province, the second worst-affected area in China, began cutting its cities off from the outside world on Feb. 2, ten days after Wuhan. Soon, just one member of a household was able to leave their apartment every two days.

Working with the government, Alibaba’s fintech affiliate Ant Financial and social media giant Tencent rolled out digital quarantine platforms to alleviate the situation. The systems assign users a rating based on their health status and travel history. Cities are not required to adopt the platforms. Still, Alibaba says they are being used in more than 200 cities across China, effectively functioning as health passports.

The aim is simple: To track people’s mobility and regulate their movements based on an assessment of their potential Covid-19 infection risk. Users need to self-report their health status, including whether they have any symptoms associated with the virus that has killed nearly 3,300 people in China. 

The result is a pass that dictates whether people are free to move around the cities in which they live, or confine themselves to their homes for a specified amount of time. A red pass requires its holder to quarantine themselves at home for 14 days while those rated yellow need to isolate themselves for a week. People with green codes can travel freely, scanning QR codes at residential compounds and supermarkets to track where they have been and update their color pass if needed.

People in Hangzhou were quick to adopt the QR code system, and a broad lockdown of the city was replaced with targeted quarantines.

Alipay’s system is going national, and cities around the country have started accepting health passports issued in other provinces, partially normalizing travel between many cities. But TechNode’s reporting also found significant regional variations in how the system is implemented. In Beijing, for instance, paper passes still take precedence over the health passport platforms. In Shanghai, QR codes are rarely inspected, and checkpoints do not appear to scan codes to generate further data for the system.

Read more: How China is using QR code apps to contain Covid-19

Tencent said during an earnings call last week that its system is currently used by 900 million people in 300 cities across China. “Health Code has become the most used ePass for verifying health and travel history during the outbreak,” said Martin Lau, the company’s executive director and president. 

While health data and travel histories are used to drive the QR code system, it is unclear what other types of information are being fed in and used for surveillance. This haziness is causing people to change their behavior. 

Across the country, people need to provide identifying information when purchasing such medicine online. Transactions made through delivery services Meituan and Ele.me prompt buyers to provide their ID details if the medication can be used to treat a cough or fever, according to a TechNode investigation. 

“We will do our best to protect your personal information security,” reads a disclaimer in Meituan’s app when paying for such medicines. The company says it is required to report the information to epidemic prevention and control authorities.

Meanwhile, many people have avoided using shared bikes following rumors that the data may be shared with the health passports, causing them to change color if they bike near a known case of the virus.

The result of the combination of these platforms is a patchwork of systems with different purposes and run by various organizations, in which users have little visibility into how data is transmitted, analyzed, and stored. There is no clarity over who developed the algorithms that drive these platforms nor how they work, but also little appeal for those who find themselves disadvantaged.

In a statement to TechNode, an Alibaba spokesperson said that the company acts only as a conduit for health passports, providing a platform for local governments, which run the systems and control users’ data. The company denied having any access to users’ information.

Still, the close relations between the government and a private company have made some uneasy.

“I’m very much against this combination of government and enterprise control of big data,” said one Weibo user of the health passport system. “I’ve been sitting at home for so long that I had to give in [and register],” they added.

Others said that the measures are reminiscent of “The Truman Show,” a 1998 film in which a man’s life is carefully tracked, scrutinized, and broadcast on television.

In addition to these concerns, several high profile data leaks from government-backed surveillance programs over the past year highlight a danger to China’s population.

In March last year, Dutch researchers found an online trove of 364 million social media records that had been mined from WeChat, QQ, and e-commerce giant Taobao’s merchant-customer communications system Wangwang. The data was unsecured and accessible to anyone with a little know-how.

The operation targeted China’s internet cafe users, who are required to register their identities when using such services. The surveillance system collected identity numbers, chat logs, and locations, and sent these details to the police, the researchers said.

In another case, the same researchers found an unsecured database containing the ID and location data of more than 2.5 million people in the northwestern province of Xinjiang. The surveillance database belonged to Sensenets Technology, a Shenzhen-based facial recognition company that has worked with Chinese police in several cities around China.

In China, privacy protection is primarily focused on keeping other companies from accessing the data, not the government, Martin Chorzempa, research fellow at Washington-based think tank the Peterson Institute of International Economics, told TechNode.

“A lot of thinking needs to be done on how this information is shared with local officials while preventing them from unauthorized sharing,” he said.

Increasingly strict data protection regulations require companies to ensure that sensitive personal data remains secure while granting the government access to users’ information should they request it.

There are indications that the health passport system could survive the epidemic. An expert quoted by Chengdu Business Daily said he expects health passports to “increase the efficiency and lower costs of healthcare services” even after the outbreak wanes.

According to Patrick Poon, a Hong Kong-based researcher at Amnesty International, the increased data collection and surveillance amid the outbreak sacrifices people’s rights to privacy “for the sake of public health,” adding that the crisis could have been handled better if the government had been more transparent. 

Poon highlighted how doctors working in Wuhan who shared information on WeChat in December about a “Sars-like” disease that was beginning to sweep the city were quickly reprimanded and silenced. One such doctor, Li Wenliang, died of the disease on Feb. 6. 

“The government will definitely use this as an excuse to enhance surveillance,” said Poon.

Meanwhile, netizens are also worried: “After the outbreak, will the collection of personal information continue?” asked one Weibo user. Several others shared similar concerns.

“In China, that is not an unlikely outcome given its history and culture of surveillance,” said CUHK’s Tsui.

Wide-ranging QR code surveillance will be challenging to implement long term. The tracking process is far from automated, and to get people to scan ubiquitous codes, cities have had to set up checkpoints and deploy legions of guards. Not all cities that have QR codes have made this investment. And even in those that have, enforcement fell off quickly.

Regardless, governments see their response as a vindication of surveillance, and the experience could drive further investments in automated systems.

China’s biggest online travel agencies have reopened booking for domestic holiday packages and attraction tickets after the country’s tourism industry came to a two-month standstill following the outbreak of Covid-19.

Why it matters: Authorities in China are attempting to return the country to a state of normalcy. As a result, online travel platforms could see a spike in demand for domestic destinations as infection rates soar outside of China.

• The Covid-19 pandemic has had a massive impact on the international travel industry as countries around the world impose travel restrictions and airlines shut down routes to worst-hit areas.

Details: Chinese online travel agencies Ctrip and Qunar have begun presale bookings for domestic packages in April and May, the South China Morning Post reported.

• Ctrip started selling the travel packages and attraction tickets through its app earlier this month after China began reopening tourist spots around the country.
• As of March 17, tickets to nearly 1,500 popular tourist areas could be bought online and 40% of the country’s top tourist spots had reopened, the report said.
• Qunar said that user searches for the upcoming May 1 holiday had increased by nearly 80% in a week.
• The growing interest in travel comes after nearly two months of restrictions on mobility to control the virus that has killed nearly 3,300 people in China.
• Ctrip warned last week that its first-quarter revenue could plunge by as much as half as a result of travel restrictions.
• The company is reportedly seeking to raise $1.2 billion in loans from domestic and international banks to refinance and fund working capital, Bloomberg reported.

Context: Companies like Ctrip and Qunar have taken a massive hit after the Chinese government imposed citywide lockdowns in the country and countries around the world imposed travel bans on people coming from China.

• China’s tourism revenue is expected to drop by RMB 1.18 trillion (around $167.72 billion) in 2020, according to the China Tourism Academy.

Nio, the darling of China’s electric vehicle (EV) industry, appeared to teeter on the edge of bankruptcy for months. With no major investments, the company was set for disaster as global markets began melting down over Covid-19. But Nio turned out to have an ace in its pocket: the government. 

The company is not alone. China’s government is fighting an uphill battle to keep its electric vehicle (EV) industry afloat. But authorities are now pulling back from an effort to wean the sector from state support. 

EV sales in China have plunged after the central government cut subsidies by up to 50% in June. The impact of these cuts was swift and severe. Sales of new energy vehicles (NEVs) dropped by 7% year on year to 8,000 cars in July following growth of 80% in June, marking the first fall in more than two years. 

Overall vehicle sales in the country during peak buying season—known as “Golden September” and “Silver October”—did little to boost deliveries. In January, sales plunged by more than half to 44,000 vehicles compared to the same time a year before. 

But things were about to get worse. The government had no way of predicting that in just a few months its already flagging EV sector would suffer another major hit when a new flu-like virus began circulating unabated at the turn of the new year. 

The virus, coupled with sink-or-swim measures to drive EV companies to innovate, could have devastating effects on EV makers this year. 

Bottom line: The government wanted to remove the training wheels from its electric vehicle industry, cutting subsidies and pulling back support, but its plan has backfired and 2020 could be the industry’s worst year yet.

• The China Association of Automobile Manufacturers (CAAM) was expecting a bad year before the virus, and it’s got even worse. In late December the organization forecast zero EV sales growth for the year, and since the virus, it’s warned of a further drop of 25% for the first half of the year in a best-case virus scenario.
• Regulators and city governments are now reintroducing support for the industry. In some cases, local authorities have offered to bail out troubled automakers as the sector reels from the dramatic slowdown in sales. 

Playing catch up: China was late to car production, lagging behind the US, Japan, and Germany in building gas-driven cars. But the Chinese government saw EVs as an opportunity to catapult itself into pole position to become the driving force behind electrifying mobility. 

To achieve this, authorities created incentives for automakers to produce electric vehicles, eventually leading to a regulatory bubble that bred nearly 500 EV companies in the country. 

• In 2009, the government introduced subsidies for EV buyers in China to encourage adoption of NEVs, spending more than $60 billion.
• The average subsidy was around RMB 60,000 (about $8,500) per vehicle. 
• The government also extended support to companies that produce batteries—the most expensive component of an EV. China is now home to two of the world’s biggest battery makers, CATL and BYD. 
• Authorities also began giving away license plates for these kinds of cars, waiving fees that add significantly to the price of purchasing gas-driven vehicles. 
• The government support created fertile ground for new EV startups—including Nio, which was founded in 2014.

Poor product: Even with subsidies, Chinese consumers have proved suspicious of electric vehicles. Nio hasn’t been immune despite its legions of loyal fans. The company’s sales are still far from being able to support its business. 

• In interviews, car buyers have expressed concerns over the range, safety, and battery life of EVs. Subsidies may have offset some of these concerns in the past, but government cuts have made these vehicles a far less attractive proposition. 
• Apart from fires, battery performance has car owners complaining that EVs aren’t living up to automakers’ promises. Several taxi and ride-hailing drivers TechNode has spoken to said that the batteries underperform, especially in winter, when they see a drastic decline in performance.
• This makes range anxiety a significant concern for taxi drivers as well as general car buyers. EVs typically perform better on urban roads, where, unlike traditional gas-driven cars, they use less energy. On highways, range can decrease dramatically, especially when driving at speeds in excess of 100 km/h. 

And dangerous: Safety questions have further hurt consumer confidence. Nio, the poster child of China’s EV sector, last year recalled nearly 5,000 of its flagship ES8 SUVs over a battery fault. At the time, the number made up around a quarter of all its vehicles sold. 

• The cost of the recall was huge. Nio spent around RMB 340 million in a bid to ease fear and anger from its customers, according to its 2019 Q2 results. This caused an 8.8% quarter-on-quarter increase in costs of sales to RMB 2 billion over the three months ended Jun. 30.
• Nio wasn’t alone. Tesla and BYD owners also reported fires in China, while videos of burning cars make their way around social media. 

Sink or swim: Seeing these problems, authorities decided that EV companies were not innovating fast enough, instead relying on government support to sell their vehicles. The government started scaling back support last year, hoping that competition would force EV makers to address the public concerns and develop Tesla-beating batteries. 

In June, the subsidy system saw dramatic cuts, and, at the time, the government hoped to phase them out entirely. Nio and other EV makers were forced to make a difficult decision—absorb the costs or pass them on to their customers. 

• EVs with a range of 400 kilometers or more saw subsidies cut by half. Meanwhile, cars that can only travel 250 kilometers on a single charge no longer receive a subsidy.
• Local governments also did away with their own financial support systems, instead diverting the funds to EV charging infrastructure.
• The scale of the cuts had many alarmed—subsidies were reduced by up to 70% in some cases.. 
• Regulators also raised barriers for new EV makers, as a quick fix to the bubble created by earlier support. Companies that want to outsource manufacturing of their EVs, a popular model used by Nio and other firms including Xpeng, must have invested at least RMB 4 billion in R & D over the past three years. 
• To encourage competition further, China opened up its automotive sector to the world, scrapping foreign ownership limits on companies that make NEVs, allowing companies like Tesla to run wholly-owned subsidiaries in China. 

The fallout: But the subsidy cuts backfired, and apprehension over buying EVs increased. This, coupled with the economic uncertainty from the US-China trade war meant that the EV market took a dramatic turn for the worse. A month after the cuts, Nio’s sales plunged by more than a third, with ES8 deliveries plummeting by 80% to 164 vehicles.

• The overall EV market has seen consecutive declines over each of the past six months.
• China’s NEV sales recorded its first-ever annual decline to 1.2 million units in 2019, down 4% compared to the year prior. In December, deliveries dropped by nearly 30% year on year, a smaller decrease compared to previous months. Following a historical low in during the Spring Festival holiday, sales fell by a further 77% to just 11,000 vehicles in February. 
• More expensive cars and a weakened economy also mean Chinese consumers have less buying power.

As if it weren’t bad enough without a pandemic: As China worked to get the Covid-19 outbreak under control, cities were brought to a standstill and whole industries shut down. On Jan. 23, just weeks after the virus was first reported in Wuhan, the city was locked down. The measures quickly spread across the country and authorities extended the Lunar New Year holiday, forcing automakers to shut their factories. 

• Experts say the Covid-19 pandemic will now have a devastating effect on China’s EV market. Analysts from US investment bank Jefferies predicts that vehicle sales in China could decline by as much as 10%. 
• Meanwhile, Robin Zhu, analyst at asset management firm Bernstein said in a note that he expects “high single-digit” declines in the auto sector as a whole. 
• New electric vehicle manufacturers including Nio have had trouble keeping afloat as the company struggles to sell vehicles. CEO William Li said this week that its management team has significant concerns about its capacity to sustain operations over the next 12 months due to financial constraints. 
• The company has already cut thousands of jobs to deal with the mounting pressure, and, until recently, had a hard time raising fresh funds. 
• Bernstein analysts estimate that Nio could only have enough cash to support itself until the second quarter, making a cash injection. The EV maker also said in its fourth-quarter results that it doesn’t have enough capital to get it through the next 12 months.

U-turn: The dramatic decline in the electric vehicle market has led the government to rethink its approach. Authorities appear to have realized that scaling back support may have been premature and it was unwise to let the industry go it alone. But for Nio, a little help selling cars wouldn’t save the company—it still loses money per car. It needs investors to make payroll.

• In January, before authorities lost control of the outbreak, Miao Wei, Minister of Industry and Information Technology (MIIT), said that Beijing would suspend its plan to completely remove EV purchase subsidies this year. 
• The government looks unlikely to increase subsidies at a national level, opting rather to freeze them as they are.
• The move is aimed at calming the market and preempting bankruptcies among EV firms. 

Local rescue: As Nio looked bound to fail, a local government stepped in. The eastern Chinese city of Hefei saw its chance to raise its own profile while bailing out the poster child of China’s EV market. The near-complete deal will see Nio moving its China headquarters to the city, where it manufactures its vehicles in a partnership with state-owned automaker JAC.  

• A number of cities in the southern Chinese province of Guangzhou, as well as China’s central Hunan province, said in early March that they would reintroduce subsidies to boost consumption. 
• Nio in late February revealed a major financing project set to close in April worth more than RMB 10 billion with the government of Hefei, a city in eastern China. The investment may be enough to bring Nio back from the brink, and it without it, the company most likely would have faced insolvency.

What’s next? EV makers face compounding issues. Aside from a months-long sales slump, these companies now have to contend with the fallout from Covid-19. The virus not only means that companies won’t hit their production targets, but that Chinese consumers will have less spending power over the next few months as a result of the epidemic.

China won’t allow its electric vehicle industry to fail. The government will continue to adjust its policies to ensure success and support the industry, as well as the companies that represent it. Nio’s bailout is just the tip of the iceberg and recent policy changes could foreshadow renewed government support going forward. 

The government is already taking additional steps to aid its ailing EV industry. In a recent guideline issued to boost consumption in the country, the central government underlined its efforts to provide financial support to drive EV adoption, as well as rolling out a wider network of charging infrastructure.  

Nio claims that it needs just three months to start making money per car. If it’s right, maybe all it needs is more time to turn things around—but its path to sustainability is reliant on getting people to buy its cars, which right now, might be a hard sell.

Artificial intelligence company Sensetime has delayed its plan to go public in Hong Kong, and is instead seeking up to $1 billion in private funding.

Why it matters: Sensetime has faced numerous hurdles since late last year as it laid plans for its initial public offering (IPO). In October, the US blacklisted the company along with several other Chinese AI firms, effectively blocking it from doing business with American companies.

• The Covid-19 outbreak, which was first reported in the central Chinese city of Wuhan and has now infected more than 200,000 people worldwide, has weakened investor sentiment, causing a massive drop in the number of companies listing in Hong Kong.

Details: Sensetime is looking to raise between $500 million and $1 billion in private funding from new and existing investors or pre-IPO fundraising, the Nikkei Asian Review reported, citing people familiar with the matter.

• The company was working on its listing with investment bank China International Capital Corp. last year but put its plans on hold following the US blacklisting.
• While rival AI firm Megvii previously filed to go public in Hong Kong, Sensetime believes it could see more success in its IPO if it waits, Nikkei sources said.
• “We do not have any new financial plans or information to share at this stage,” a Sensetime spokesperson said in a statement to TechNode on Thursday.
• The company expected its 2019 revenue to increase by 200% to $750 million, Reuters reported in December.
• Sensetime’s valuation reached $7.5 billion in 2019, CEO Xu Li said last year. The company was valued at $4.5 billion in 2018 following its $600 million Series C.

Context: Sensetime was one of eight Chinese companies blacklisted by the US in October over alleged complicity in Beijing’s human rights violations in China. Megvii, surveillance camera maker Hikvision, and speech recognition firm iFlytek were also included in the export ban.

A Baidu engineer has been sentenced to three years in prison after using the company’s servers to mine cryptocurrency, making a profit of RMB 100,000 ($14,300).

Why it matters: Mining, the process of verifying transactions on a blockchain for reward, is computationally and power-intensive, resulting in high electricity usage.

• While cryptocurrency trading is illegal in China, mining is not. The country accounts for around 66% of all mining operations globally, with southwestern Sichuan province taking the lion’s share.

Details: An Bang, a 31-year-old from northeast China, installed software on 200 of Baidu’s servers between April and July 2018, allowing him to use the computing power to mine Monero.

• An made the equivalent of RMB 100,000 from the mining operation, a court document showed.
• Baidu said the company noticed unusual activity on its servers and contacted the police after investigating the issue.
• The additional resource use cost Baidu around RMB 27,000, according to the document.
• An was charged for illegally taking control of a computer system, and sentenced to three years in prison and fined RMB 11,000.
• The engineer joined Baidu in 2016, where he worked in the company’s search operations and maintenance department.

Context: China last year decided not to ban crypto-mining, removing the activity from a list of those set to be eliminated by the end of 2020.

• The move came shortly after Chinese President Xi Jinping endorsed China’s use of blockchain while cracking down further on cryptocurrency trading and initial coin offerings.
• The majority of the world’s cryptocurrency mining takes place in China because of its wealth of cheap electricity. Sichuan and Yunnan provinces are popular because of the abundance of hydroelectric power, particularly during rainy seasons, and Inner Mongolia for its wealth of coal.

Stonewise, a Beijing-based platform that uses artificial intelligence (AI) for drug development, has raised nearly $10 million in Series A funding, the company said on Monday.

Why it matters: The Covid-19 pandemic has cast a spotlight on the use of AI in treating and diagnosing diseases, and its potential to quickly discover novel treatments for new and endemic infections.

• Covid-19, a new flu-like virus, was first reported in the central Chinese city of Wuhan in late December and has spread around the world, infecting nearly 170,000 people.

Details: Stonewise’s latest round of funding was led by Longhill Capital, with the proceeds being used for research and development, optimizing the company’s technology platform, and expanding its technical and management team, the firm said in a statement.

• Shanghai-based Linear Capital also took part in the round.
• Stonewise was founded in 2018 by Zhou Jielong, former principal architect at Baidu.
• The company has partnered with several domestic and international companies and research institutions including US-based biopharmaceutical firm Beyond Spring, the Chinese Academy of Medical Sciences, and Peking Univerisity’s School of Medicine, among others.
• In February, the company brought on Zhang Yingsheng as vice president of smart drug research and development. Zhang is a former senior scientist at US-based pharmaceutical company Verseon.

Context: With research centers and operations in North America and China, Stonewise is currently looking to expand globally.

• The company is working with the Institute of Materia Medica at the Chinese Academy of Medical Sciences and Peking Union Medical College to research possible treatments for Covid-19.

Driverless delivery startup Neolix has raised nearly RMB 200 million ($28.7 million) in Series A+ funding to mass-produce its self-driving vehicles, the company said on Wednesday.

Why it matters: China eased restrictions on delivery robots following the Covid-19 outbreak, resulting in a surge in demand for autonomous deliveries in some of the worst-hit areas.

• The flu-like virus has offered these firms an unprecedented opportunity to put their technology through its paces as Beijing promoted “contactless deliveries” to curb the spread of the disease.
• Neolix began mass production of its Level 4 delivery robots last year, counting companies including Huawei, JD.com, and Alibaba as customers.

Details: Neolix’s latest round of funding, which it closed in February and announced this week, is led by electric vehicle maker and existing investor Lixiang. The company is now Neolix’s second-largest shareholder after CEO Yu Enyuan.

• Meanwhile, Addor Capital, as well as previous investors Glory Ventures and Yunqi Partners, also took part in the round.
• The company plans to use the proceeds to ramp up production and operations of its delivery robots, with the new round coming less than a year after Neolix’s RMB 100 Series A.
• The company said in a statement that it expects to close another new investment in 2020.
• Neolix has a production facility in the eastern Chinese city of Changzhou and aims to sell 100,000 vehicles a year in the next four years, according to Bloomberg.
• The company’s primary focus is food delivery, mobile retail, and security applications—in cooperation with local governments.
• Neolix has produced 225 delivery robots in the two years since it was founded, the company said.

Context: While Covid-19 has thrown delivery robots into the spotlight, the technology still faces technical and regulatory hurdles.

• The Chinese government has allowed lifestyle services platform Meituan and e-commerce giant JD.com to run their autonomous delivery services, but many companies are still only permitted to operate within geofenced areas.
• The unpredictable nature of traffic and pedestrians, especially on small, congested roads, present significant challenges to wider adoption.
• Nevertheless, Alibaba founder Jack Ma predicts that within a decade more than 1 billion packages could be delivered by driverless vehicles daily in China.

As China ramped up its efforts to counter the spread of Covid-19, delivery robots have garnered newfound attention.

Beijing has since pledged to increase its support to upgrade the nation’s freight delivery systems. The government also asked companies for solutions to contain the virus, including various forms of “contactless shopping deliveries,” as people around the country became afraid to leave their homes.

At this moment of crisis, some businesses saw opportunities for largely unproven technologies. In an effort to protect the public, lifestyle services giant Meituan and e-commerce firm JD.com started using their unmanned delivery technologies in some of the worst-hit areas.

Just 60% of deliverymen have returned to work in Wuhan since authorities cut the city off from the world. The remainder have been unable to re-enter the city since the lockdown began. Worse still, those in Wuhan have been under both physical and mental pressure from the burgeoning workload and concerns over the epidemic.

With drivers locked in and locked down, the companies had no choice but to experiment with the new tech. 

JD’s self-driving robot made its first delivery of medical supplies to Wuhan’s Ninth Hospital on Feb. 6. The facility, designated for treating seriously ill patients, is just 600 meters from a JD distribution center. The close proximity put delivery people at risk of infection, Zhou Jianbin, a district manager of JD Logistics in Wuhan, told The Paper.

The majority of deliveries in Hubei include masks, protective clothing, and other medical supplies. However, the process is not completely automated. JD employees need to place orders in the cars before the deliveries begin. Typically, the robots will alert a user that their delivery is ready for collection and wait 30 minutes for them to collect the goods.

The robots are responsible for half of all daily deliveries, around 10-20 orders each day, according to Zhou. Although only two robots are currently being deployed in the city, JD said it is gradually making a shift to serve the nearly Ninth Hospital with fully driverless delivery.

Due to a significant spike in demand for unmanned deliveries in Wuhan and surrounding cities, the commercial launch of JD’s robot delivery service came well ahead of schedule, said Qi Kong, head of autonomous driving and JD Logistics. The e-commerce giant had initially planned to start mass-producing its driverless vehicles by the end of the year, but now expects to roll out more than 50 robots by the end of April.

A week after JD debuted its robots in Wuhan, Beijing-based Meituan began piloting two driverless delivery robots in the city’s northeastern Shunyi district. Running at just 20 kilometers (12 miles) per hour, the pint-sized vehicles deliver groceries to residents of three neighborhoods within a five-kilometer radius of its pickup station. Each robot delivers up to five orders per trip.

The company did not specify how many orders its autonomous fleet delivers per day. According to Meituan, the robots work as an alternative form of last-mile delivery to help alleviate the shortage of delivery drivers. 

The company is also piloting robots at restaurants in Beijing that bring food from kitchens to deliverymen or customers waiting for takeaway meals, in an effort to limit contact between people. The company claims that these robots are not “replacing humans entirely,” as the service currently still requires human-robot collaboration. 

Technical and regulatory hurdles

While the Covid-19 has offered unmanned delivery providers both government support and an unprecedented opportunity to put their technology through its paces, these companies have had trouble driving adoption of autonomous delivery systems, as regulatory and technological hurdles do still present significant roadblocks to companies such as Meituan and JD.

Regulations governing autonomous driving have long frustrated automakers and tech companies, but the situation is even stickier for unmanned delivery services in China.

To begin with, there is no space on roads dedicated specifically for delivery robots, Zhao Bin, head of public affairs at JD Logistics, told Chinese media in February. Before JD launched its Wuhan Ninth Hospital robot delivery service during the outbreak, the Chinese e-commerce giant had to get hasty approval from government agencies to survey the roads and get maps drawn.

Current Chinese laws are not well-equipped to govern self-driving vehicles, which are not legally allowed to drive on public roads. Various pilot programs are able to operate only because the government issues temporary license plates to approved self-driving companies. Without this permission, the use of these vehicles is illegal and companies must bear all liability for accidents.

The Chinese government has given JD and Meituan permission to run robot deliveries, but many more companies can only run their services in geo-fenced areas such as office parks and school campuses.

Meanwhile, other firms are unable to even get their plans off the ground. According to Chinese media reports, one anonymous self-driving company initially planned to use low-speed driverless vehicles to transport meals from a restaurant in Beijing to a nearby hospital for doctors and patients, but the company eventually had to backtrack on its plans.

Even Baidu, the poster child of China’s self-driving ambitions, only gained lackluster support during the outbreak, deploying just two robots for sterilizing the campuses of two colleges in Wuhan, alongside dozens of others in Shanghai, Shenzhen, and Guangzhou. The company claimed one of its invested startups began delivering meals to medical staff in Beijing Haidian Hospital starting Feb. 14.

The industry also faces technological challenges. These vehicles currently face enormous limits in their abilities to operate under certain road and weather conditions. The unpredictable nature of traffic and pedestrians, especially when these vehicles attempt to navigate congested roads within residential communities, present significant challenges to wider adoption. A lack of road markings and bad weather further compound these difficulties.

As Bob Zhang, CTO and co-founder of ride-hailing company Didi, has previously made clear, self-driving technology has a long way to go before it can navigate a wide range of weather conditions safety.

Propelled by machine-learning algorithms and a package of hardware that includes various sensing technologies, a delivery service robot can be quite expensive, with prices starting at RMB 100,000 ($14,220). Fortunately, the cost has declined significantly over the past several years; in the early years of development, JD said in 2017, the outlay (in Chinese) could be as much as RMB 600,000 per robot.

This price tag contrasts sharply with the pay of delivery workers, which ranges from RMB 5,000 to RMB 8,000 per month, according to public information on Chinese job recruiting platforms.

Prospects

Covid-19 has revealed the potential value that autonomous deliveries can play in emergency situations. As Chinese citizens avoided infection by engaging in voluntary isolation, legions of food and grocery delivery drivers became a lifeline, providing a fresh supply of food to millions around the country.

However, there were limits. Many migrant delivery workers had made their yearly trek across the country to their hometowns, leading to a dearth of drivers in major urban centers. With fewer drivers available, deliveries that usually took 30 minutes might now be completed in around two hours.

Costs also increased. In Shanghai, for example, Alibaba’s Hema supermarket charged an additional RMB 6 for deliveries that had previously been free of charge.

The coronavirus outbreak also led to fears over close contact with delivery drivers, who had the potential to unknowingly spread infection to an untold number of other people. In response, companies launched “contactless delivery,” in which orders were left at the entrance of apartment complexes. The model had already been in use at office buildings before the outbreak, but quickly became ubiquitous as the outbreak continued.

In Hubei, the center of the epidemic, the government placed restrictions on deliveries to limit people’s exposure to the disease. Residents in small towns had to contact their party committees to get fresh food and supplies.

Delivery robots could provide a solution to these problems, and are poised to play an important role in China’s logistics industry. In less than a decade, autonomous vehicles will deliver 80% of all goods, according to the research firm McKinsey. These vehicles could increase efficiency and cut expenses in an industry where last-mile deliveries can constitute up to 12% of costs.

Xia Huaxia, Meituan’s chief scientist, told TechNode last year that machines can also be used to complement the work of delivery people by taking night shifts or working during extreme weather conditions. If a delivery robot’s lifespan is more than three years, he said, the cost of the machine will be lower than the cost of human labor.

Observers expect China’s food-delivery market to explode in the next few years. Meituan, which employed 600,000 drivers as of late last year, predicts that its daily orders will increase by 200% per day. According to Xia, in the second half of 2019, the delivery giant completed 25 million orders every day.

A little-known Chinese company said that it has developed a facial recognition technology that can identify people in a crowd wearing face masks, as people around the country don the protective gear to reduce their risk of Covid-19 infection.

Why it matters: Tech companies have been working on facial recognition software that can identify people with very little facial data.

• While the technology isn’t new, it has become increasingly relevant as China deals with the fallout from Covid-19, a highly transmissible flu-like virus that was first reported in the central Chinese city of Wuhan in late December.
• Mask wearers have presented problems for facial recognition systems that rely on identifying points around the mouth, nose, and eyes.

Details: Beijing-based Hanwang Technology said that it has developed facial recognition capabilities that can identify every masked person in a crowd of up to 30 people within a second, Reuters reported.

• The company offers two products that use the technology. Its “multi-channel” product uses multiple cameras and can be used for crowds whereas the other identifies one person at a time, at the entrance to a building, for example.
• Hanwang’s facial recognition software is used by China’s Ministry of Public Security, along with around 200 other clients in Beijing, Huang Lei, the company’s president, told Reuters. The company is looking to expand across China.
• Hanwang started working on the technology in January as the outbreak in China began to accelerate, and rolled it out a month later.
• The Covid-19 outbreak has resulted in extra surveillance measures and data collection to track the spread of the virus, a move that has garnered mixed reactions online.

Context: Several Chinese companies have touted their abilities to identify people wearing masks since the beginning of the outbreak.

• Artificial intelligence unicorn Sensetime said in mid-February that it had developed a similar system to Hanwang’s which can identify masked faces in more limited applications, such as identifying employees entering a building. The company uses 240 points on a person’s face to identify an individual, using the parts that are visible to match a face with an identity.
• Megvii in February was reported to be seeking a loan for research and development, which, in part would focus on identifying people wearing face masks.
• Meanwhile, Nanjing-based Minivision was last month commissioned by the city’s government to develop a similar system that can also measure body temperature.

Autonomous truck startup TuSimple has expanded its partnership with UPS, doubling the number of delivery runs its vehicles make for the American logistics company per week.

Why it matters: The extended alliance between the two companies is a vote of confidence for TuSimple, which aims to transform the country’s $800 billion trucking industry with fully autonomous rigs.

• UPS’s venture capital arm in August invested an undisclosed amount in the trucking company.
• TuSimple has been testing its technology on a stretch of highway between Tucson and Phoenix, Ariz. since 2018. The company also won China’s first permit to trial driverless trucks in Shanghai.

Details: TuSimple will increase the number of trips it makes for UPS to 20 runs per week, adding an additional 10 trips on a new route between Phoenix and El Paso, Texas, the company said in a statement on Thursday.

• TuSimple will continue running 10 trips a week on an existing route between Tucson and Phoenix.
• At the same time, the company said it had reduced fuel costs in its operations with UPS by 10%. Autonomous driving technologies are often touted as being more energy-efficient than human drivers.
• UPS is using its partnership with TuSimple to explore ways in which autonomous technology can improve efficiency, safety, and customer service, Scott Price, chief strategy and transformation officer at UPS, said in a statement.
• TuSimple currently has 18 contracted customers and makes around 20 autonomous trips per day.

Context: The logistics industry could see increased efficiency by using autonomous trucks as more people do their shopping online, putting increased strain on freight companies.

• The US was short 60,000 truck drivers at the end of 2018, according to estimates by the American Trucking Association, which expects that figure to triple by 2028.
• TuSimple was founded in the US in 2015 by Hou Xiaodi and splits its operations between the US and China, with offices in Beijing and Shanghai as well as in Japan.

Cybersecurity company Qihoo 360 has accused the CIA of targeting China’s government and several of the country’s critical industries in a decade-long espionage campaign.

Why it matters: The claim comes just weeks after the US charged four Chinese military officers over the 2017 Equifax breach in which hackers stole personal data, including names and addresses, belonging to 147 million Americans.

• China has long been accused of hacking American companies to gather intelligence and steal intellectual property.

Details: Qihoo said on Monday that between 2008 and 2019 the US may have acquired China’s “most classified business information.”

• The company said it made the discovery by comparing the sample code it had collected to CIA hacking tools released by Wikileaks in 2017.
• The collection of tools, dubbed Vault 7, was allegedly leaked by Joshua Adam Shulte, a former CIA employee who is on trial for disclosing classified information.
• Qihoo said that by analyzing when the various tools were made, the company discovered that its creators are based on the east coast of the US, where the CIA is located.
• CIA hackers targeted China’s government agencies, aviation and petroleum industries, scientific research institutions, and internet companies, Qihoo said.
• The company speculates that the US intelligence agency could steal “important figures’ travel itinerary” through its focus on China’s aviation industry.
• State mouthpiece the Global Times responded to the allegations, saying that they “lay bare the US’ astonishing hypocrisy in attacking China for years, while accusing China of cyber-attacks.”

Context: Chinese organizations are becoming increasingly vocal about reported attacks against the country by others.

• Qihoo also recently claimed that South Asian hackers were using the coronavirus outbreak to target China’s medical institutions “on the frontline” of fighting the epidemic.
• Meanwhile, China’s National Computer Network Emergency Response Technical Team said that state-backed hacking groups are garnering increased attention around the world.
• The organization said that the number of public research reports about these groups increased by almost 360% year on year in 2018.

China is working to streamline domestic travel using its controversial high-tech quarantine apps, as numerous provinces in eastern China begin to cooperate with one another in recognizing Health Code systems from other areas.

Why it matters: Provincial governments around the country have rolled out Health Code platforms to track people’s mobility and regulate their movements based on an assessment of their potential Covid-19 infection risks.

• Based on their travel histories and self-reported health information, the systems have been implemented across Chinese cities and rate a person’s risk of infection as red, yellow, or green, effectively functioning as health passports.
• Those with granted red passes are required to quarantine themselves at home for 14 days while those rated yellow are required to isolate themselves for a week. People with green codes can travel freely.
• The codes need to be presented when entering public spaces such as supermarkets, workplaces, and public transport.

Details: Zhejiang, the first place to roll out such a system, along with other eastern Chinese provinces Jiangsu and Anhui, as well as the neighboring municipality of Shanghai are working to recognize one another’s Health Codes so people from these areas can travel around the Yangtze River Delta Economic Zone with fewer restrictions, Hangzhou Daily reported.

• Foreigners and non-residents visiting or living in Zhejiang’s capital Hangzhou are allowed to register for the city’s Health Code. Other places such as Shanghai previously only allowed residents to apply for such a pass.
• Zhejiang’s Health Code is also accepted in central Henan province, southwestern Sichuan province, and the island province of Hainan.
• Health Code systems are have been rolled out in more than 200 cities across China, with Alibaba’s fintech affiliate Alipay and Tencent providing the backbones for the various platforms.
• Netizens have expressed their concerns about the systems, drawing correlations with the 1998 film “The Truman Show,” in which a man’s life is closely tracked, scrutinized, and broadcast on television.

Context: The agreement highlights China’s urgency in getting people back to work, especially those who have not yet returned to the cities in which they are employed.

• The country’s economy has taken a hit following the outbreak of Covid-19, a flu-like virus that has killed nearly 3,000 people in China.

Search giant Baidu’s profits ballooned in the fourth quarter but the company warned of flagging revenue during the first three months of 2020 as a result of economic uncertainty from the novel coronavirus outbreak.

Why it matters: Baidu has seen mounting competition from companies like Bytedance and Tencent which have been enticing advertisers and Chinese consumers with their short video and social apps.

• Baidu reported its first quarterly loss since listing in 2005 during the first quarter of last year.
• The company’s share price plunged by nearly 30% last year. Gaming and internet giant Netease and lifestyle services company Meituan have surpassed Baidu in market value.

Details: Baidu’s Q4 revenue reached RMB 28.9 billion, up 6% year on year, the company said in a statement on Thursday, beating analysts’ expectations of RMB 28.4 billion.

• However, the search giant forecast a 5% to 13% year-on-year decline in its top-line figures to between RMB 21 billion and RMB 22.9 billion in the first quarter of this year, below the midpoint of analyst estimates.
• “The Coronavirus situation in China is evolving, and business visibility is very limited,” the company said of its guidance.
• The expected plunge casts a shadow on Baidu’s better-than-expected Q4 results. The company’s profits soared to RMB 6.35 billion in the December quarter, up more than 200% year on year.
• Baidu attributed the positive results to growth in its cloud unit, smart devices, and video-streaming business, iQiyi.
• The company continues to face stiff competition, as companies like Bytedance, which runs content aggregator Jinri Toutiao and short video platform Douyin, eat away at the company’s advertising revenue, which fell 2% year on year to RMB 20.8 billion.
• While the short-term impact of the coronavirus on Baidu’s businesses has been negative, a side effect is that people are staying at home more and getting to know the company’s products, Baidu CEO Robin Li said during an earnings call on Friday morning.

Context: A deadly new coronavirus, dubbed Covid-19, has had a profound impact on most businesses in China, as the government prolonged the Lunar New year holiday to prevent the spread of the disease and consumers slash spending.

• Baidu is the latest company to warn the Covid-19 outbreak will affect its business.
• The outbreak doesn’t only affect firms from China. Companies around the world have brought up the possible fallout from the coronavirus during recent earnings calls.

Shanghai will become the latest city to roll out real-name registration for commuters taking the subway, following a slew of other metropolises implementing identity checks on public transport.

Why it matters: China has turned to apps to track and prevent the spread of Covid-19, a new flu-like virus that has killed nearly 2,750 people.

• However, such systems allow the government to keep a closer eye on people’s movements, prompting concern that the measures could continue once the epidemic has ended.

Details: Starting on Friday, commuters in Shanghai will be encouraged to scan a QR code in their subway car after boarding. Passengers will then be prompted to confirm their mobile phone numbers, according to Shanghai Metro’s official WeChat account.

• Unlike other cities that have rolled out the system, Shanghai commuters do not need to enter their name and ID numbers, and registration is not currently mandatory.
• However, mobile phone numbers are tied to individual IDs in China, allowing authorities to determine riders’ identities using their contact details.
• Commuters in Shanghai can use Alipay, WeChat, or map app Autonavi to scan the QR codes and register.
• Passengers will need to rescan if they change subway cars or transfer to a different subway line.
• Authorities will contact anyone who they suspect came in close contact with an individual thought to be infected.

Context: The southern city of Shenzhen and eastern China’s Ningbo rolled out similar systems last week, which in some cases apply to buses and taxis. The system in these cities is developed by gaming and social media giant Tencent.

• Meanwhile, Shenyang, capital of northeastern China’s Liaoning province, has enlisted lifestyle services platform Meituan-Dianping to develop real-name registration services for commuters in the city.
• Other cities, including Nanjing in eastern China, have also rolled out such systems.

This article has been corrected to reflect that registration in Shanghai is currently not mandatory. 

This article was co-authored by David Cohen and Chris Udemans.

As China goes back to work after weeks of epidemic lockdown, it’s betting on high-tech QR code quarantines to keep the virus from spreading.

In the eastern Chinese city of Hangzhou, scanning a QR code at a checkpoint with Alipay has become a routine part of daily life. It’s essentially a health passport for the city. A mini-app embedded in Alipay or WeChat rates people as red, yellow, or green risks. To enter an apartment complex or a market, residents must scan a QR code at a manned checkpoint, letting the system know where they are and producing a one-time color code pass to show the guard.

Hangzhou, the capital of Zhejiang province, became the first to adopt the QR code system on Feb. 11, although lockdown continued for most residents until Feb. 15. Alipay announced on Feb. 16 that it was ramping up development support for a national health code system that assesses individuals for self-quarantine based on basic health information and travel history, which it is preparing to launch this week under the guidance of the State Council, China’s cabinet.

Read more: How China built its health surveillance system

In a statement provided after publication of this article, Alibaba said that ratings are provided by government, not the company, using Alipay as a platform. Referring to widespread references in Chinese media to an “Alipay health code,” the company said: “It is marketing language used for promoting usage. In reality, these are not Alipay-issued health codes, but rather are issued by governments.”

By Feb. 20, Alipay boasted that platforms it had helped develop were already in use in over 100 cities, including all cities in Zhejiang, Sichuan, and Hainan, as well as Chongqing.

But national implementation doesn’t mean a unified national system—instead, each participating city is launching a local version of the system, creating a fragmented landscape resembling local social credit system pilots. Some have versions of Alipay’s system, some have local apps—and others have both. While online tracking ended Hangzhou’s total lockdown, many other cities have not revised quarantine rules to reflect new online systems.

How QR code systems work

As of Feb. 25, sources on the ground described very limited implementation outside Alipay’s home province of Zhejiang, ranging from paper-based lockdown in Shanghai to laxly enforced digital checkpoints in Shenzhen. Talking to locals in cities that have adopted health passport systems, TechNode saw its limits: the app alone does nothing without human-based enforcement and public compliance, and few cities outside Zhejiang have overcome these human challenges.

The system shows both how much is possible with high-tech surveillance—and how much human input is required to make such systems work.

To register, individuals provide their name, ID number, phone number. The health-rating platform, asks a series of questions, including physical health condition and whether the individual has traveled to virus-hit areas or has come into contact with infected cases, to produce an initial rating. These ratings are reported to change, likely informed by where the user has checked in and new reports of infections.

According to Hangzhou rules, residents with a green code are allowed to move around the city freely. Yellow means a seven-day quarantine is required, and red requires a 14-day quarantine. Some versions adopt a slightly different color-coding system, but the general idea is the same—to track mobility and regulate it based on risk assessments. Though the questionnaires record self-reported information, public data is used for verification purposes.

Internet users have questioned the way the system analyzes health and travel data. In numerous accounts on microblogging platform Weibo, netizens said people living in the same household were given different color codes even though they had been isolated together for weeks.

Others have expressed frustration with unpredictability, saying they were initially given a green code only to have it change to red after a few days. The colors are dynamic, and some people taking what they believe to be adequate measures to protect themselves while outdoors have had their mobility limited after their code changed color.

While Alipay’s version is associated with a State Council project, local governments are not required to adopt it. WeChat operator Tencent is working with the State Information Center to develop similar QR code-passed health passports.

Tencent’s version, called “Tencent Healthcare Code,” is already available in provinces including Guangdong, Sichuan, and Yunnan.

While the system has the potential to bring a semblance of normal life back to places that have been locked down for weeks due to the outbreak, to create a surveillance system capable of tracking 1.4 billion people everywhere they go comes at great challenges and costs.

To enter market, scan QR code

Uny Cao, a resident of Hangzhou, says that he scans twice a day—once when he goes to the vegetable market, and once when he returns home. Getting on the subway, riding a bus, or going to a park would mean more scans, so he’s chosen to limit these behaviors. Many also avoid borrowing share bikes, reasoning that the apps may share data with the Health Code:

“A few days ago, they found a new case in City North. Rumor spread that if you have rented a shared bike in that region, your code might get a downgrade,” he said. “So for those few days, I avoided renting shared bikes, in case they discover a new patient in my area.”

According to our observations, there is no place that enforces the health passport system as rigorously as in Zhejiang.

Regular scans both track and shape behavior. Sources told TechNode that citizens are required to show their code to be scanned when entering supermarkets and residential areas as well as getting on the subway and buses.

For Hangzhou residents, the inconveniences are a small price for something like normal life—for the ten days before the app launched, the city was forced to stay indoors except for short trips to buy food every other day. Since the code system came in, residents have been allowed to leave their homes and even to drive to other cities.

Even here, enthusiasm has its limits: While apartment buildings and food markets appear to be rigorously enforcing the rules, TechNode correspondents have walked into banks past napping checkpoint guards. Restaurants and smaller shops are starting to re-open without check-in systems.

The Hangzhou version of the mini-app, which the national version will reportedly be based on, allows non-Hangzhou residents and foreigners to register. Other places such as Shanghai and Shenzhen’s platform only allows residents to apply for a pass.

The Hangzhou health passport works for long-distance travel. When a TechNode correspondent traveled from Shanghai to Hangzhou, train station staff checked travelers’ health codes and wrote down their ID numbers. Travelers who had applied for codes outside of Hangzhou had no problems entering the city.

Mileage may vary

Beyond Hangzhou, enforcement can be more lax. In Jinhua, a city in Zhejiang 180 kilometers south of Hangzhou, a 25-year-old city resident told TechNode that she only needs to use the system when taking public transport. Her local supermarkets and residential community do not check the color of her QR code when she leaves her apartment. The system is enforced more stringently for out-of-towners, she said.

In a rural area, quarantine guards suggested a TechNode correspondent write down an ID number on a piece of paper to save time registering with a local version of the color codes mini-app.

But other cities can enforce non-app limits far more strictly, suggesting that they do not fully trust the app: A resident in the eastern Chinese city of Ningbo says there are checkpoints set up at community complexes and supermarkets. People are being asked to show, but not scan, their QR code at public places. On top of enforcing the new health code system at the community level, the previous lockdown rules still apply, the Ningbo resident said. In her apartment compound, residents are required to show the QR code at the entrance of the complex and still adhere to the rule that every household can only send one person out every two days.

The source also said her relative purposely left out the fact that he just came back from Wuhan when filling out the questionnaire. The police called days later and ask why he didn’t report it. They found the license plate under his name had been in Wuhan recently.

For people that have returned to their work, they have to show the QR code when leaving the apartment complex and also show a document from their employer that permits them to return to work.

Active but unused

TechNode sources described health passport systems that were implemented either spottily or not at all. In some places, including Shanghai, Beijing, and central China’s Hubei, the worst-hit province in the country, apps were superseded by strict offline measures; in others, such as Guangdong, quarantine appears to be lax.

More than a week after launching a track-everything health code system, Shanghai is still very much relying on paper records to enforce a 14-day quarantine on all new arrivals. Shanghai launched health passports as a new feature within its pre-existing “Health Cloud” mini-app on Feb. 17, accessible on Alipay and WeChat. But TechNode correspondents could not find a place to scan the app inside the city, finding checkpoints at office buildings and apartment complexes relying on paper records and paper cards or stickers to identify approved residents or workers.

In Shenzhen, the headquarter of internet giant Tencent, sources say that the health code system has been mostly ignored as the city hurries to get back to work.

Henk Werner, head of Shenzhen-based hardware incubator Trouble Maker, told TechNode that he and his friends had not bothered to register for the local version unless they wanted to take the subway. Residents are being asked to show QR codes at places like the parking lot of an apartment complex, but found it possible to bypass the checkpoint. Another source in Shenzhen says she hasn’t bothered to register—and that she’s going to work by taxi every day with a paper pass.

The central city of Xi’an has used a more limited pass system that requires scan check-ins but does not display a color code for about a week. Graduate student Liu Weiqi and TechNode editor Wang Boyuan both described checkpoints at the entrances to apartment compounds, but saw mixed use of the app. While Wang saw people using the app to enter his apartment compound, Liu made a trip to the market by bus on Feb. 25, and found that in practice he was registered on paper records everywhere but the market. On Feb. 25, the city announced that it is adopting a version of Alipay’s color code-based pass app.

A source in Chengdu said even though the city implemented a health passport on Feb. 21, it’s not enforced. Residents can go out without being asked to show the code. She said it’s probably because the area she lives in is mostly locals rather than out-of-towners, who are seen as being a higher risk.

At the epicenter of the outbreak, attempts to roll out the health check system have also had limited effect, simply because no one is going out to be checked. Earlier this week Wuhan, the city at the epicenter of the Covid-19 outbreak, launched a Tencent version of the health passport. The local government now recommends residents who need to leave their apartment complex for valid reasons to apply for the pass.

Wu Chuan, a 26-year-old resident of Yichang, a city in Hubei that is approximately a four-hour drive from Wuhan, told TechNode he hasn’t stepped out of his home for close to a month and wasn’t aware of any health passport platform in Hubei.

The city has a strictly enforced health-reporting system that requires citizens to fill out an application if they plan to leave the community complex. Without official approval, they’re forbidden to do so. Wu said the health passport system does not seem to have much use in his city because, unlike Hangzhou and other metropoles that actually allow people out and go about their usual activities, it is still under lockdown.

Suizhou, a city 180 kilometers northeast of Wuhan, has also begun implementing a health passport system. People with green codes will need to have their temperatures checked before being allowed through checkpoints. Those with yellow and red codes will not be permitted to pass. The system is not yet mandatory and a resident of the city told TechNode that she is still not allowed to leave her residential community.

Big data, huge payroll

It is unclear whether the implementation will improve after the launch of the national version of the health code this week. Although it is a standardized system across the country, according to Alipay, local governments have the liberty to decide whether they want to adopt the version of not.

In order for the system to work, cities need to deploy checkpoints on highways and roads, on public transportation, and apartment complexes—which requires tremendous manpower to operate. Then they need to supervise these guards closely enough to make sure they do the work.

Hangzhou under the watchful eye of an app shows us what an extreme version of mass surveillance might look like. But it also shows how far we are from that world—it takes a lot more than the click of a button to know where people are.

This article was edited Feb. 26 to include comment from Alibaba.

Artificial intelligence firm Megvii’s application to list on the Hong Kong stock exchange has lapsed six months after the company filed its paperwork for a listing on the city’s bourse.

Why it matters: The Alibaba-backed startup has faced several hurdles as the company attempts to go public. Megvii was blacklisted in the US along with several of its Chinese counterparts, effectively banning it from doing business with American companies without permission.

• Megvii initially filed its application for its initial public offering (IPO) during the second half of 2019 but reportedly decided to push back its listing to this year following additional scrutiny from the Hong Kong board.
• Megvii has also seen delays as a result of the China-US trade war and protests that broke out in Hong Kong last year.
• The novel coronavirus has added additional complications to the company’s plans, as many Chinese businesses came to a standstill in the weeks following the Lunar New Year holiday.

Details: Megvii’s IPO status was listed as “lapsed” on the Hong Kong stock exchange’s website on Tuesday. IPO applications are required to be finalized within six months of their submission date.

• The company plans to refile for a listing in Hong Kong as soon as it has updated its financial data from 2019, two sources close to the matter told Reuters.
• Megvii was not immediately available for comment when contacted by TechNode on Tuesday morning.
• According to Hong Kong rules, companies can renew lapsed applications within three months of expiration.
• Megvii had not disclosed how much it seeks to raise in documents submitted to the Hong Kong stock exchange, but estimates range from $500 million to $1 billion, according to people cited by Bloomberg and Reuters.
• The company in May raised $750 million in a funding round led by Bank of China’s equity arm. The investment valued Megvii at more than $4 billion.

Context: Megvii is one of several companies spearheading China’s AI boom. Others include Sensetime, Yitu, and Cloudwalk, though none have yet gone public.

• Megvii could become the first to tap the capital markets and act as a litmus test for other companies in the same industry to follow.

The US has approved an application by speech recognition firm iFlytek to exempt the company from a months-long trade ban in order to buy medical supplies.

Why it matters: An epidemic of a new flu-like virus dubbed Covid-19 has killed nearly 2,600 people in China after appearing in the central Chinese city of Wuhan late last year. The outbreak has resulted in medical supply shortages around the country with hospitals in several major cities appealing to the public for donations.

• The US placed several Chinese technology companies including iFlytek on the so-called Entity List in October, effectively blocking them from doing business with American companies without permission.

Details: iFlytek applied for an exemption on Feb. 7 to make “charitable donations” of medical supplies that it was restricted from buying in the US as a result of the ban. The US Department of Commerce has subsequently approved the request, iFlytek said in a filing to the Shenzhen Stock Exchange on Monday.

• The company said previously that it had commissioned a US-based law firm to submit a formal exemption request, making an appeal “in the spirit of humanitarianism and international cooperation.”
• The Covid-19 outbreak has put huge pressure on China’s healthcare system. Hospitals in Beijing, Guangzhou, Shanghai, and Shenzhen, among others, have asked the public to donate respirator masks and other medical supplies for healthcare workers.
• iFlytek said its artificial intelligence technology is being used to screen people for Covid-19. The company’s tech is also being used in online learning platforms for house-bound students around the country.

Context: China’s tech sector mobilized its resources to curb the spread of the infection. Meituan, Alibaba, and Tencent, among other companies, have made donations exceeding RMB 3 billion ($429 million).

• Meanwhile, companies including AI firm SenseTime have started offering online classes while students learn at home amid school closures because of the virus. E-commerce platforms have also stepped in. JD.com vowed to ensure adequate supply of face masks to the public and curb consumer stockpiling.
• The US blacklisted iFlytek and several prominent Chinese AI companies including Sensetime and Megvii over their alleged complicity in Beijing’s human rights violations in the Xinjiang Uighur Autonomous Region.

Artificial intelligence firm Laiye has raised $42 million in Series C funding, the company announced on Monday. The round comes as Chinese startups scramble for cash amid a new flu-like epidemic that has swept the country.

Why it matters: Fundraising by Chinese startups has this year slumped by around 60% year on year to $1.8 billion. The number of deals has fallen to 168 from 440 at the same time, according to data from consultancy Preqin.

• The virus, known officially as Covid-2019, has created uncertainty for startups as investors worry about the short-term effects of the outbreak on China’s economy.
• In June, Laiye raised $35 million in a Series B led by cross-border venture capital firm Cathay Innovation.

Details: Laiye’s Series C is co-led by Lightspeed Venture Partners and Lightspeed China Partners, the company said on Monday.

Context: Laiye last year merged with Awesome Technology to launch UiBot, an RPA platform that allows companies to automate rule-based operations that the company claims will “significantly improve operational efficiency,” while decreasing labor costs.

An increasing number of cities around China are requiring commuters to register their identities when using public transport, as the country ramps up efforts to contain the spread of a deadly new flu-like virus.

Why it matters: Real-name registration was previously used for transport between cities. Its expansion to intracity transport is an attempt to track the possible spread of the virus.

• Nevertheless, such systems enable the government to keep a closer eye on the movements of the country’s citizens, with people voicing concerns that such measures could become permanent.
• The virus, dubbed Covid-19, was first reported in the central Chinese city of Wuhan in late December and has subsequently spread across the country, killing more than 2,200 people.

Details: Commuters in the southern city of Shenzhen and east China’s Ningbo are required to log their identities by scanning a QR code before boarding various kinds of public transport.

• The system employed in both cities is developed by Tencent and is available through popular messaging app WeChat.
• Lifestyle services company Meituan-Dianping has developed a similar platform for transport authorities in Shenyang, capital of northeastern China’s Liaoning province, TechNode reported earlier this month.
• In Shenzhen, commuters taking a bus or hailing a taxi will need to scan a QR code on the vehicle in order to log their trip.
• Meanwhile, in Ningbo, commuters will be required to use the platform when taking the subway.
• The first time a user scans one of the codes they will be prompted to confirm their identification details before continuing with their trip.
• The system also provides warning messages via SMS and WeChat to people who have traveled with someone suspected of being infected.
• If a passenger is not carrying a mobile phone they will need to complete the process manually by contacting transportation staff or their taxi driver.
• Collected data are minimal and kept encrypted, Tencent said.

Context: Cities around China have taken stringent measures to curb the spread of the virus while still allowing public transport to run. Transportation in the worst-affected areas has been shut down.

• Subways around the country have been checking passengers’ body temperatures to stop the spread of the disease.

Sensetime has launched a series of free online educational tools allowing Chinese students to learn about artificial intelligence, as schools around the country resort to using online classes amid a virus outbreak that has rocked the country.

Why it matters: An epidemic of a flu-like virus dubbed Covid-19 has killed more than 2,000 people in China. The outbreak has resulted in extended closures for schools well beyond the Spring Festival holiday.

• China’s education ministry on Monday launched a national cloud learning platform that is aimed at providing learning resources for high school students around the country.
• Meanwhile, schools have started hosting classes online and broadcasting them on TV so students don’t fall behind on their studies.

Details: Sensetime will offer complimentary videos for AI-focused online classes, an interactive platform for learning to program and practicing AI theories, and courses for educators to learn how to teach the content, the company said in a statement on Monday.

• The video classes focus on the fundamentals of AI, machine learning, and robotics. The content is available on several online learning platforms in China, including provincial educational cloud platforms and video-sharing site Bilibili.
• Meanwhile, teachers can use Sensetime’s instructor training materials, which include details on “AI development to applications and algorithms.”
• Sensetime is also offering free live-streamed lessons that allow for real-time conversations, the company said.
• During the first semester of the 2019-2020 school year which began in September, 140,000 students from cities including Shanghai, eastern China’s Qingdao, as well as Hong Kong and Macau used the company’s AI curriculum, Sensetime said.

“AI applications have made contributions to the prevention and control of the epidemic—in terms of screening, diagnosing and monitoring the disease through data analytics. With the rapid adoption of AI technologies in various industries, we see a rising demand for AI talents.”

—Lynn Dai, general manager of Sensetime’s education business

Context: Sensetime is not the only company offering free online classes as a result of the outbreak. Vipkid pledged to offer free classes to children between the ages of four and 12.

• Meanwhile, schools around the country have been using Alibaba’s enterprise communication platform Dingtalk and Tencent’s Wechat Work to conduct remote video classes so students don’t fall behind.
• Around 50 million students and 600,000 teachers used Dingtalk to conduct remote classes on Feb. 10, the first day back in class for many students after the extended holiday.

Last year, when a leading automotive industry body predicted that a prolonged slump in electric vehicle sales would end in 2020, it had no way of knowing what was in store as China prepared for its Lunar New Year celebrations.

Just a few weeks earlier, however, people in Wuhan, the capital of central China’s Hubei province, began falling victim to a mysterious respiratory illness. Cases of the disease, now known to be a new coronavirus—belonging to the same family as SARS, MERS, and the common cold—have ballooned. The virus has since spread to every region in China, but infection rates show no signs of abating.

China’s electric vehicle industry now faces compounding difficulties. As the country attempts to stop the spread of the infection, authorities have taken far-reaching measures that could have an implosive effect on the country’s economy, as well as its already-flagging EV market.

Just days before the Spring Festival, the government took the unprecedented step of locking down entire cities in  Hubei province, effectively quarantining more than 50 million people. Similar measures have also been implemented in eastern China’s Zhejiang province.

In addition, 11 of China’s 31 provinces have extended the holiday by more than a week to prevent further infections. (The New Year’s holiday began on January 23 and was originally due to end on January 31.) In the commercial hubs of Guangdong and Zhejiang provinces as well as Shanghai, authorities have announced that non-essential businesses should only return to work on February 10. 

“These provinces alone are normally responsible for over two-thirds of vehicle production in China,” IHS Markit said in a note.

The research firm now expects that measures will result in a first-quarter production loss of about 350,000 vehicles, down 7% year-on-year. If quarantine measures are imposed until mid-March, that number could increase to 1.7 million units, IHS said. Beijing has set sales goals of 2 million NEVs this year, up 40% compared to 2019.

Should the second figure prove sound, the overall market decline could lead to a shortfall of around 85,000 NEVs for the year, or around 7% of all NEVs sold in 2019, according to TechNode’s calculations.

“How this plays out will be determined by the even more opaque second-round indirect effects on the economy, income growth, and consumer confidence, and thus on the severity of impact on auto sales in the coming months,” IHS said of the overall auto market.

Production delays, supply chain woes

As various provinces prolong the holiday, factories in a number of cities have yet to open their doors, which could put strain on the global automotive supply chain.

“If this situation continues, supply chains will be disrupted. There are forecasts that predict the peak for infections will drag on until February or March,” Reuters quoted Volkmar Denner, CEO of Bosch, the world’s largest automotive supplier, as saying.

Bosch has 23 manufacturing facilities in China, two of which are located in Wuhan.

Bosch isn’t alone. Since the government announced the measure to curb the spread of the virus, the production of vehicles, both electric and gas-driven, has slowed dramatically. Toyota, which sells hybrid vehicles in China, said all its factories in the country would remain closed until February 9, in line with transport lockdowns.

Meanwhile, Honda and Renault, which both have factories with Chinese automaker Dongfeng, will open their factories in Wuhan on February 10. Both companies offer electric cars in the Chinese market.

Other EV makers, including Tesla and Nio, are no less vulnerable to the effects of the outbreak. The Shanghai government has required that the US automaker shut down its production plant in the city until the end of this week. Nio’s vehicles are produced by state-owned carmaker JAC in eastern China’s Anhui province, which has also extended the holiday over coronavirus concerns.

During an earnings call last week, Tesla CFO Zach Kirkhorn said that the shutdown would have minimal effects on the company’s profitability. Nevertheless, Bernstein analysts said that around 82% of Tesla’s retail volume in China comes from the 40 worst-hit cities, while those cities make up 68% of Nio’s sales.

“The latter looks especially vulnerable to a prolonged slump in EV sales,” the analysts said. “We expect EV sales in China to be worse hit than the broader market. Consumer adoption of EVs in China is highly concentrated in the top cities where license plate restrictions and other policies enforce EV purchases.

Industry donations

As the number of confirmed cases of the new virus surges, global automakers and Chinese OEMs have scrambled to make big donations to fight against the outbreak while also burnishing their images. At the time of writing, more than 45 automakers, Tier 1 suppliers, and large auto dealers have provided donations worth RMB 500 million (about $70 million).

BMW, the top premium car seller in China last year, was the first to act—offering RMB 5 million in aid. Chinese auto giant Geely gave a lavish RMB 200 million, with dozens of minivans for medical transport. Meanwhile, state-owned FAW and GAC ramped up support with follow-on donations of RMB 30 million and RMB 8 million, respectively. Even loss-making EV makers including Nio and Xpeng have joined the ranks of generous donors.

Meanwhile, Tesla found itself riding a wave of public outrage. The company initially “did its bit,” according to Zhu Xiaotong, president of Tesla Greater China, by offering Tesla owners free unlimited access to its supercharging network until the epidemic was over. This, however, generated sharp criticism among both followers and critics.

“No donation from Tesla? … Even Nio, a company near bankruptcy, offered several million yuan … Will Tesla do nothing in China other than making money?” wrote a user with the handle “Sailamborghini,” commenting on a post by Tesla on microblogging platform Weibo.

“[You] might as well donate some US-made face masks,” another user using the handle “Xiele-.” Two days later, the American EV giant announced a donation of RMB 5 million for virus control to mollify public anger.

Donations are a form of relief not just for those stricken with the illness but for the companies themselves, given the possible impact on the domestic and global auto market and supply chain if the situation in China gets worse. Currently, the Chinese government allows businesses to deduct donations from taxable income, without exceeding 12% of their annual net profit. Ren, the Evergrande economist, has suggested removing the restriction to boost donations and stabilize the economy.

Search giant Baidu has released an open-source tool to detect whether individuals in crowds are wearing face masks, as cities around the country impose rules requiring use of such protection in public spaces.

Why it matters: Authorities in China have taken drastic measures to curb the spread of Covid-19, a new flu-like virus that first appeared in the central Chinese city of Wuhan late last year.

• In Hubei, the province at the center of the outbreak, whole cities have been cut off from the outside as China attempts to contain the virus.
• Several cities including Guangzhou and Beijing are enforcing the use of masks in public areas, including restaurants, shopping malls, and public transport.
• Mask inspections have largely been manual, making identifying non-mask wearers in crowds difficult.

Details: The face-scanning model uses artificial intelligence to identify people in real-time who are not wearing masks or those who are wearing them incorrectly, Baidu said on Thursday.

• The system can identify non-mask wearers with 96.5% accuracy, which meets the needs of routine inspections, according to the company. Developers then only need a small amount of data to train the tool for their own use.
• The model was trained on a dataset of 100,000 faces, Baidu said.
• The system, which Baidu claimed is the first of its kind, can help businesses check if their employees are wearing masks, and also help authorities speed up mask checks in public places.

Context: Face masks have become a necessity in China, where nearly 1,400 people have died as a result of the infection.

• Experts around the world say that hand-washing is more important than wearing masks. Nevertheless, masks are seen as mandatory in China.
• People around the country have opted to isolate themselves in their homes and businesses have implemented work-from-home policies to counter the spread of the disease.
• Baidu recently released another tool allowing people to determine risk levels for Covid-19 infection using the Chinese government’s diagnosis and treatment plan for the virus as well as records from millions of online medical consultations.

China’s internet regulator has emphasized the need for effective data protection amid the ongoing Covid-19 epidemic as public concern over the misuse of their data grows.

Why it matters: The new flu-like virus has killed 1,367 and infected more than 50,000 people since it was first reported in the central Chinese city of Wuhan in late December.

• Authorities in some Chinese cities require returning citizens to report their health status daily, generating huge amounts of data.
• Meanwhile, first-tier metropolises like Shanghai have mandated that travelers fill out their personal information and travel history in an app before arriving in the city to assess whether they require further screening.
• People returning home from Wuhan have found their personal data circulating in online chat groups after reporting their arrival to local authorities.

Details: The Cyberspace Administration of China (CAC) said this week that no organizations other than those authorized by the National Health Commission may use Covid-19 as a reason to collect personal data without permission.

• The notice from the CAC comes amid rising concern over Covid-19 data leaks. People reporting to local authorities following visits to Wuhan have found their personal information, including names, ID numbers, and addresses, circulating in chat groups on popular messaging app WeChat.
• Those people said they had received threatening phone calls and messages telling them to isolate themselves even if they show no symptoms of the virus after a 14-day incubation period.
• In its notice, the CAC said that personal information that is gathered to control the epidemic may not be used for other purposes.
• The notice largely reiterates data protection measures in already existing laws and specifications.
• Data collection should be limited to people who are suspected of being infected, have already been diagnosed, and those who have had been in close contact with infected individuals.
• The watchdog said that discrimination based on where someone is from or has been should be prevented.

Context: Stigma surrounding people from the worst-affected areas of China has spread, resulting in whole villages shutting themselves off from outside visitors.

Personal data leaks spread along with coronavirus panic

Search giant Baidu has released a tool allowing people to determine risk levels for infection by Covid-19, a new flu-like virus that has swept China over the past month.

Why it matters: The number of deaths from the disease reached 1,100 on Wednesday, with nearly 44,000 people infected.

• The virus has caused panic and distrust around the country, with entire gated communities blocking entry to visitors.
• Meanwhile, many are avoiding going outdoors to lower their risk of infection. Companies around the country have permitted their employees to work remotely.

DingTalk, WeChat Work overburdened as hundreds of millions work remotely

Details: The Covid-19 Intelligent Self-Test Tool (our translation) uses the Chinese government’s diagnosis and treatment plan for the virus as well as records from millions of online medical consultations to assess whether a user is at low, moderate, or high risk of having caught the bug.

• Available within Baidu App, the system uses questions relating to an individual’s age, gender, symptoms, and whether they have traveled to or been around people from Hubei, the province at the center of the outbreak, in order to assess their medical status.
• The platform functions much like a messaging service, allowing users to input answers to mostly multiple-choice questions.
• Users are also required to provide information about possible risk factors, including pulmonary diseases, hypertension, and liver and kidney disorders.
• After analyzing a user’s data, the platform then provides recommendations depending on their risk levels. Those at low risk are advised to take precautions to avoid infection while others at high risk are told to seek medical attention.
• The platform aims to help users “reduce psychological panic” around the epidemic by allowing them to make preliminary judgments about their medical conditions, according to Baidu.

Context: China’s tech sector has mobilized against the virus, with numerous companies launching tools to help the public stay informed and safe during the epidemic.

• Tencent’s mobile payment platform WeChat Pay and online insurance platform WeSure are offering eligible merchants hospitalized with Covid-19 up to RMB 1,000 ($143.5) for 30 days, while not requiring the funds to be repaid.
• Baidu has also previously launched a service that provides free online Covid-19 consultation with real doctors.
• China has also released a platform allowing the public to check if they have been in close contact with someone that may be infected with the virus while traveling via rail or air.

Speech recognition firm iFlytek has applied for an exemption to a US trade ban in order to buy medical supplies amid a national campaign to curb the spread of the novel coronavirus.

Why it matters: More than 900 people have died as a result of the infection, which was first reported in Wuhan, the capital of China’s central Hubei province, in late December. Medical supply shortages have been reported across the country, with hospitals in several cities requesting donations from the public.

• The government has locked down 15 cities in Hubei, effectively quarantining more than 50 million people. Similar measures are now being taken in Zhejiang province, on China’s eastern seaboard.
• The US placed iFlytek along with several other Chinese technology companies and government agencies on the so-called US Entity List in October, effectively banning them from doing business with American companies.

Chinese tech firms brace for impact from coronavirus

Details: iFlytek seeks to make “charitable donations” of medical supplies that it is currently restricted from buying in the US as a result of the ban, the company said in a filing to the Shenzhen Stock Exchange on Monday.

• iFlytek has commissioned a US-based law firm to submit a formal request to the US Department of Commerce “in the spirit of humanitarianism and international cooperation,” the company said.
• The outbreak of the coronavirus has accelerated since mid-January, putting immense pressure on the country’s healthcare system. Major hospitals in cities including Beijing, Guangzhou, Shanghai, and Shenzhen have appealed to the public for donations of respirator masks and other supplies for healthcare workers.
• iFlytek has switched to a non-US supply chain following the ban, the company said, instead using domestic suppliers.

Context: China has mobilized its tech sector in an effort to curb the spread of the infection. Dozens of companies including Meituan, Alibaba, and Tencent have made donations in excess of RMB 3 billion ($429 million), while also deploying their technologies in applications ranging from diagnosis to tracking the spread of the disease.

• Meanwhile, e-commerce platform JD.com vowed to ensure adequate supply of face masks to the public and to place curbs on consumer stockpiling.
• The US blacklisted iFlytek and several prominent Chinese artificial intelligence companies including Sensetime and Megvii over their alleged complicity in Beijing’s human rights violations in the Xinjiang Uighur Autonomous Region.

Chinese internet security experts claim that South Asian state-backed hackers are targeting China’s medical sector as the country struggles to keep up with ballooning infections from a new flu-like epidemic that is sweeping the country. Researchers at the Chinese internet security giant Qihoo 360 made the claim in a Feb. 4 blog post.

Why it matters: More than 28,000 people have been infected with the deadly novel coronavirus that emerged in the central Chinese city of Wuhan in late December.

• The infection, which as so far killed 564 people, has spread panic and distrust around the country. Many from the worst-affected areas have had their personal data and travel itineraries for the Chinese New Year holiday leaked online.
• South Asia is home to Pakistan, China’s “all-weather friend”; and India, which often sees Beijing as a strategic nuclear rival; as well as Bangladesh, Afghanistan, Sri Lanka, Nepal, Bhutan, and the Maldives.

Personal data leaks spread along with coronavirus panic

The researchers condemn the attacks as a threat to China’s efforts to control the epidemic:

“It can be said that epidemic warfare is closely linked to cyberspace warfare, and cyberspace has become another important battlefield for epidemic warfare.”

–Qihoo 360 researchers

Details: Qihoo identifies the hackers as members of a South Asian advanced persistent threat (APT) group. APT groups are typically state-backed organizations that access private information for a prolonged period while remaining largely undetected.

• The attackers used novel coronavirus-themed emails as bait to launch attacks on organizations “on the frontline” of fighting the epidemic, according to Qihoo. The researchers did not say which medical facilities or researchers were targeted nor did it specify which group was responsible for the attacks.
• The attackers attach excel files, among others, to emails, which, when opened, install a backdoor program onto a victim’s computer. Backdoors typically allow remote access to an infected computer.
• One such file was titled “Wuhan Travel Information Collection Application Form,” according to Qihoo.
• The company confirmed the attack to originate from South Asia after comparing it to previous offensives from the region.

Context: Qihoo 360 is one of several companies that have reported a rise in the number of coronavirus-related phishing campaigns.

• Both IBM and Kaspersky said they have seen wide-ranging phishing campaigns that use the coronavirus as bait.
• The attacks described by IBM and Kaspersky do not target China, but other countries in the region including Japan, as well as the US and UK.
• Some of these emails claim to offer information about coronavirus protection.

Personal data for residents of Chinese cities at the center of a ballooning coronavirus outbreak are being spread online, as the stigma surrounding people from the worst-affected areas grows.

Why it matters: More than 17,000 people in China have been infected with a new coronavirus, which was first reported in late December in Wuhan, capital of Hubei province in central China. The epidemic, which had killed 361 people in the country as of Monday morning, has resulted in widespread panic and uncertainty as the rate of new infections shows no sign of abating.

• The government has locked down 15 cities in Hubei, effectively quarantining more than 50 million, the largest such measure in history.
• People from Hubei, those who have come into contact with individuals from the area, and individuals who have recently visited the epicenter of the outbreak have been subject to greater surveillance as the government attempts to curb the spread of disease.

INSIGHTS | What coronavirus means for China tech

Details: Hubei residents have found information including their phone and ID numbers, home addresses, and travel itineraries circulating in chat groups on popular messaging app WeChat, Sina reported.

• Returnees to many areas have been requested to register with authorities when returning home from Hubei over the Chinese New Year holiday season, and in doing so, provide personal information to officials tasked with monitoring the movements of people coming from areas hit the hardest.
• However, this information has been shared widely on messaging platform WeChat by local authorities, according to the report. These files can then be sent to other groups and users using the platform’s forwarding feature.
• Travel itineraries for people traveling to and from Wuhan have also been widely spread, the report states. This information includes flight and train numbers, dates of travel, as well as personal information including names and ID numbers.
• A number of the people affected by the leaks have reported being harassed by phone and WeChat by unknown individuals demanding they “immediately isolate” themselves even if they have shown no symptoms after the 14-day incubation period.
• Many users on Twitter-like microblogging platform Weibo implored others not to spread the personal information any further.

“It is illegal to disclose personal information, which seriously violates our legal rights and threatens our personal safety.” 

—Weibo user Miyanlushe, who studies in Wuhan

Context: Stigma surrounding those from Wuhan has grown as the coronavirus spreads, with villages around China isolating themselves from outside visitors.

• Since the government locked down Hubei, communities around China have taken matters into their own hands, at times blocking off entrances into their towns to ensure their residents remain uninfected.

US tech giant Apple handed over more user account data to authorities in China than any other country in the first half of 2019, according to the company’s biannual transparency report.

Why it matters: Apple’s report details the number of times governments around the world request information about the company’s users.

• While the report does not include detailed information about the kinds of information that is released to authorities, it provides insights into the relationship between big tech and governments around the world.

“Account-based requests generally seek details of customers’ iTunes or iCloud accounts, such as a name and address; and in certain instances customers’ iCloud content, such as stored photos, email, iOS device backups, contacts or calendars.”

—Apple’s transparency report

Details: Between Jan. 1 and June 30 last year China’s government petitioned for information relating to nearly 15,700 user accounts in 25 separate requests. Due to US regulations, Apple can only release transparency data six months after a reporting period.

• Apple said that it complied with 96% of China’s petitions for account information.
• The company did not specify the number of accounts in each of the 25 requests, only that it complied with the majority of them.
• Only one request related to content from user accounts, the company said. It is unclear how many accounts were included in this request.
• Meanwhile, authorities in the US, Apple’s home market, requested access to data from 15,300 accounts.
• Apple’s legal team reviews requests to determine whether they have a valid basis, according to the company. If no basis is found, the request is challenged or rejected.
• During the same period, Apple removed 194 apps from its App Store for legal reasons following requests from Chinese authorities, accounting for 90% of removals worldwide.
• The majority of China’s requests related to apps with “pornography and illegal content,” the company said.

Context: The number of accounts included in China’s requests has more than doubled compared with the second half of 2018, while compliance rates have fallen by 2 percentage points from 98%.

• Apple in October pulled from its Hong Kong App Store a crowd-sourced police-tracking map app after state-owned media People’s Daily blasted the company for “assisting rioters.”

Researchers from artificial intelligence startup Sensetime have created the “largest” benchmark for deepfake detectors, allowing developers to train and test systems that attempt to identify face forgeries.

Why it matters: Used to manipulate media using artificial intelligence to create realistic-looking videos, images, or sounds, deepfake technology has sparked concerns that applications including facial recognition systems could be fooled, leading to compromised personal data. In popular cases, celebrities’ faces have been superimposed on bodies that are not their own.

• China has enacted rules that require online platforms to clearly mark content that has been created using deepfakes, deep learning, virtual reality, or other technologies.

“The popularization of ‘deepfakes’ on the internet has further set off alarm bells among the general public and authorities, in view of the conceivable perilous implications. Accordingly, there is a dire need for countermeasures to be in place promptly, particularly innovations that can effectively detect videos that have been manipulated.”

—Researchers from Sensetime and Nanyang Technological University

China targets ‘deepfake’ content with new regulation

Details: Sensetime Research created the benchmark, dubbed Deeper-Forensics-1.0, along with Singapore’s Nanyang Technological University. The researchers claim the dataset is 10 times larger than others of its kind, consisting of 60,000 videos made up of 17.6 million frames.

• Sensetime said that all source videos were carefully collected, and fake videos were generated with a newly proposed face-swapping framework.
• The researchers collected face data from 100 paid actors from 26 countries, 53 of which were male and 47 female, to build DeeperForensics-1.0. The actors fell between the ages and 20 and 45, which is the most common age group that appears in real-world videos, Sensetime said.
• The researchers added that the videos in the dataset are “more realistic” than others that exist. They also included footage at different rates of compression and blur in order to mimic real-world scenarios.
• The benchmark also includes a hidden test set, which contains manipulated videos that were able to trick human evaluators, they said.

Context: Deepfakes gained widespread attention in China in September when popular face-swapping platform Zao was thrust into the spotlight over privacy issues. Released on August 31, the app quickly went viral in China before its policies allowing excessive data collection were publicized. Zao quickly became a sensation, with its servers hitting maximum capacity on the day of its launch.

• Regulators took notice, summoning executives from its parent company, dating platform Momo, to discuss Zao’s data collection practices.

China’s securities watchdog has approved an application from chipmaker Rockchip to list on the Shanghai bourse, as the company taps the capital markets following an unsuccessful attempt to go public three years ago.

Why it matters: Founded in 2001, Rockchip failed to list on Shenzhen’s ChiNext board in 2017 for “critical sales stagnation and asset decline,” according to China Money Network.

• ChiNext was set up as a way for predominantly high-tech firms that do not meet the requirements of Shenzhen’s main board to go public.
• China plans to domestically produce 75% of all key components, which includes chips, by 2025 amid a protracted trade war with the US.

Details: Based in the eastern Chinese city of Fuzhou, Rockchip has launched a series of artificial intelligence (AI) chips since its failed listing.

• Rockchip’s revenue in the first half of 2019 reached RMB 574 million ($83.3 million) while its net profit was RMB 66 million.
• The company’s full-year 2018 revenue grew around 2% year on year, while its profits surged 80% to reach RMB 192 million during the same period.
• China Industrial Securities is underwriting the chipmaker’s initial public offering (IPO). The company’s roadshow will be held online on Friday.
• Rockchip said its IPO will not exceed 42 million common shares.
• The company launched its first AI chip in 2018, followed by another in 2019 that combined AI and internet of things (AIoT) infrastructure, which enabled voice recognition and face detection functionality.
• Payments platform Alipay uses Rockchip’s AI chip solution in its Dragonfly facial recognition point of sales system.
• The company holds around 400 patents, which include 27 for integrated circuit designs, according to its prospectus. Manufacturers including Samsung, Sony, Huawei, Oppo, and Vivo have adopted its products, the company said.
• It is unclear whether Rockchip will list its shares on the main Shanghai exchange or the high-tech STAR Market board.

Context: Rockchip produces chips for handheld devices including tablets and smartphones, as well as TV boxes, IoT hardware, and is looking to tap the smart speaker market.

• While China has downplayed its Made in China Initiative amid trade tensions with the US, the country is setting out ambitious goals to increase its technological independence, a move that will be driven by domestic companies.

The US government plans to terminate one of its largest civilian drone programs over concerns that devices at least partially made in China may be used for spying, the Financial Times reports, citing two people familiar with the matter.

Why it matters: Chinese-made civilian drones have become a focal point for the US government, as officials warn that Beijing could use photos taken with onboard cameras for intelligence purposes.

• The move to ground the fleet received opposition from various agencies over concerns that the grounding could cost the government time and money.
• The US army outlawed the use of DJI drones in 2017. Congress is also considering banning the federal government from buying Chinese-made drones.

Details: The US Department of Interior will ground its nearly 1,000 drones after determining that they pose an unacceptable level of risk as Beijing could be using the devices for spying.

• Secretary of the Interior David Bernhardt has not approved a final policy. The devices may be used in special situations, including emergencies, and for training purposes, FT sources said.
• The interior department has already temporarily grounded drones with cameras, which the agency used to tackle wildfires and to map terrain, while their risks were reviewed.
• Numerous government agencies have objected to the ban, according to documents seen by the FT. The Fish and Wildlife Service detailed in a note that the temporary ban has affected their operations. The agency had to cancel flights to count animals and monitor controlled burns, which are used to reduce wildfires.

US Interior Department to ground Chinese-made drones: report

Context: Against the backdrop of the US-China trade war, Washington has sought to limit US exposure to Chinese technology.

• Chinese companies are under increased scrutiny over national security concerns. Telecommunication firm Huawei was put on a US blacklist in May, effectively banning it from doing business with American companies.

Editor’s note: This post about Tencent investments originally appeared in our members’ only weekly newsletter, accompanying Elliot Zaagman’s analysis of Tencent’s global investment strategy published here. Sign up and read it first.

Tencent has an interesting investment strategy. In every sector except gaming, they spread their bets, usually taking only a 20% stake. However, as we discovered, that strategy still has room for variation. In preparation for Elliott Zaagman’s analysis of their investment strategy, we collected, cleaned, and visualized the publicly available data on how the tech major deploys its money.

One pattern was very clear: in relatively mature markets (US and India) they prefer to make a lot of small bets at the early stage. In immature markets (Southeast Asia and Africa), they go with larger players at later stages.

Our hypothesis: mature markets have already been won so it makes more sense to invest in smaller, but potentially disruptive companies. In immature markets, where they have less expertise and the market is still rapidly developing, it makes more sense to invest in companies who have already won or are about to. No matter which market, however, Tencent only likes making acquisitions in the gaming space, where it still garners the biggest proportion of revenue.

The data present is incomplete, though. We only included investments with publicly available funding data. Even then, we still don’t have exact figures on how much Tencent invested, no matter if they were led or followed-on. In addition, we don’t include the value of acquisitions, mostly of gaming companies (for gaming acquisitions, PC Gamer has a helpful overview). Elliott’s piece, the data he gathered and that we present below, is just one way of interpreting the data. If you have other interpretations, we’d be glad to hear them.

—John Artman, Editor in Chief

Data security startup DataCloak has closed its Series A worth $13 million, the company announced on Tuesday.

Why it matters: China hopes to create a cybersecurity industry worth RMB 200 billion ($28.7 billion) by 2025, with a handful of domestic companies taking on their international counterparts.

• Enterprises are putting increased focus on addressing internal data leaks rather than just threats from outside their corporate networks.
• In addition, China’s 2017 Cybersecurity Law and this year’s Encryption Law governing cryptography have forced companies to improve their security. This has created a market for cybersecurity companies that help other firms with compliance.

“We will continue to increase investment in research and development, consolidate the core advantages of independent intellectual property rights, and provide customers with better products and innovation.”

—Liu Chao, DataCloak CEO, in a statement

The Chinese startup using AI to keep sensitive data confidential

Details: DataCloak’s latest round of funding was led by Jeneration Capital, Co-Stone Asset Management, and Green Pine Capital Partners. Previous investor Matrix Partners China also took part.

• DataCloak will primarily use the proceeds for continued research and development as well as market expansion, the company said in a statement.
• DataCloak provides services that allow employees of an enterprises to securely access corporate data wherever they are in the world by combining multiple technologies that allow for increased control over who can access sensitive data.
• The company last raised in 2018 with a $5 million Pre-A led by Matrix Partners China.

Context: Founded in 2018 by a former senior senior director and engineers from Baidu, Shenzhen-based Datacloak employs “zero-trust” computing, in which users are not trusted only because they have access to a corporate network.

•  The company provides a means for secure communications between a device and company network and allows for configurable security levels for every user on a network.
• Data leaks are an all too common occurrence in China in spite of ever-stricter laws aimed at minimizing potential damage.

Data security startup DataCloak is using artificial intelligence (AI) and “zero-trust” computing to give companies greater control over their sensitive information to combat internal and external threats.

The backstory: Founded in early 2018 by a former senior director and engineers from search giant Baidu, DataCloak provides solutions to ensure sensitive data remains confidential.

• The Shenzhen-based company comprises former Google, Tencent and Baidu employees, with CEO Liu Chao setting up the company alongside co-founders Wu Ye and Yang Yifei.
• The company has already raised $5 million and is seeking additional funding despite its recent formation.

Unique selling point: DataCloak wants to allow employees of an enterprise to securely access corporate data wherever they are in the world. They do this by combining multiple technologies that allow for increased control over who can access privileged information.

• DataCloak follows the “zero-trust” approach to data security, where users are not trusted purely because they are on a corporate network.
• The company achieves this by setting up an isolated and secured workspace within an employee’s computer or smartphone, with only registered devices able to access a corporate network.
• While files and clipboard data can flow freely into the workspace, information flowing from within can be controlled and later audited, lowering risks of data leaks.
• DataCloak provides secure communication between a device and a corporate network from anywhere in the world, and allows for configurable security levels for every device. This permits a company to choose who can access what data.
• The platform also features AI-driven security, which learns a workspace users’ normal behavior to identify abnormalities that could act as an alert for a potential threat.

“We try to protect the owners of data during the whole data lifecycle, from generation to transformation, as well as the data flow. This could be the source code from a software company, it could be users’ private data held by banks, or even invoices or customer lists. We don’t trust based on where you are; we don’t trust you based on our account name; we don’t trust a laptop purely because it’s distributed by your company. We use a ‘don’t trust, always verify’ approach”

—Cui Yongxin, chief operating officer of DataCloak 

The investors: DataCloak has attracted attention from Matrix Partners China, which led its $5 million Pre-A Series in September 2018. The company is currently finalizing its Series A.

The landscape: China’s cybersecurity industry will reach RMB 63 billion ($8.95 billion) this year, according to figures from the China Academy of Information and Communications Technology.

• Data leaks are a common occurrence in China despite strict laws to limit the fallout.
• Enterprises that do not sufficiently protect their customers’ data can face severe penalties, including having their business licenses revoked.
• Numerous high-profile tech companies in China have suffered data breaches. In April, drone maker DJI said an employee leak cost the company RMB 1.1 million.
• Anime-streaming platform Bilibili has also had its share of problems, with user data shared in a Github repository earlier this year.
• In some cases, stolen data has gone for as little as $0.01.

Prospects: China’s 2017 Cybersecurity Law and an upcoming law governing cryptography have forced companies to improve their security.

• This has created a growing market for cybersecurity companies looking to help other firms with compliance.
• Additionally, as more employees bring their own devices to work, increasingly innovative solutions are needed to make sure corporate data remains safe.
• Data brings both wealth and power to those who hold it, increasing the need to ensure that it is kept secure and that access to critical data is controlled.

Facebook is suing two Chinese nationals and a Hong Kong-based advertising agency for allegedly using the platform to deceive internet users into installing malware, allowing them to compromise “hundreds of thousands” of social media accounts to run ads for counterfeit goods.

Why it matters: The lawsuit is not the first the social media giant has filed this year against a Hong Kong company.

• In August, Facebook sued an app developer in the city for implanting malware into Android apps that created fake clicks on the social network’s ads for financial gain.
• Meanwhile, the company has been attempting to repair its battered reputation following the privacy issues that arose from the Cambridge Analytica scandal.

Details: Facebook has filed the lawsuit against ILikeAd Media International Company Ltd., as well as Chinese nationals Chen Xiaocong and Huang Tao for creating and distributing the malware.

• Facebook said ILikeAd used images of celebrities in their ads to entice people to click on them, a practice known as “celeb bait.”
• The social media giant also alleges that the defendants made use of a practice known as cloaking, which disguises an ad’s destination link in order to get around the company’s ad review protocols.
• Facebook said the campaign began as early as 2016 and continued to August 2019.
• The company said that since April it has been notifying “hundreds of thousands” of users that their accounts may have been compromised.
• Facebook is seeking an injunction to stop ILikeAd from abusing its platform, as well as damages.

“Cloaking schemes are often sophisticated and well organized, making the individuals and organizations behind them difficult to identify and hold accountable. As a result, there have not been many legal actions of this kind.”

—Facebook in a statement

Context: In August, Facebook sued Hong Kong-based app developer LionMobi for “click injection fraud,” allowing the company to profit from fake clicks on ads displayed on a smartphone.

• Facebook’s complaint was also lodged against Singapore-based developer JediMobi.
• Both companies were banned from Facebook’s Audience Network, which allows advertisers to extend their campaigns across the internet and into apps.

Editor’s note: This article was sponsored by BMW China. We believe in transparency in our publishing and monetization model. Read more here.

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As autonomous driving technology is bringing up reformation of traditional automotive industry, BMW is actively adopting its innovation strategies. Opportunities go together with significant challenges, “The complexity of Chinese road condition is much higher than that of western countries, which requires designated solutions.” Peter Riedl said during an interview at TechCrunch Shenzhen 2019, Riedl heads up the Tech Office China under the BMW China R&D umbrella, which is the biggest R&D footprint outside Germany. Besides, he also mentioned other influence factors such as traffic laws applied by different regions, thorough communications and understanding are certainly needed.

BMW R&D Centers in Beijing, Shanghai and Shenyang structured the biggest research network outside of Germany, BMW’s headquarter. These R&D centers support cutting-edge topics like Electric Vehicle, Autonomous Driving, Connected Cars, etc. BMW Group stepped into Autonomous Driving R&D in the year of 2006. Currently, over one hundred tech experts in Beijing and Shanghai are striving together with their counterparts in BMW HQ and other European R&D teams to guarantee 7/24 efforts  on this topic.

BMW Group has become the first foreign OEM to be awarded the license by the Shanghai Government to test autonomous driving cars, which could be spotted in Shanghai International Automobile City. And to fasten the development of autonomous driving technology, BMW works closely with Chinese technology companies. In July, 2019, BMW announced its partnership with ChinaUnicom, Tencent and NavInfo (a leading digital map solution provider).

Except for co-operation with tech giants, BMW Group never stopped seeking the rising stars. Starting from 2015, BMW Group set up the BMW Startup Garage program, which is the venture client unit within BMW to provide startups a gateway into the multi-trillion dollar automotive industry. The BMW Startup Garage looks to become the early adopting venture client of top startups that can make a difference to innovation at the BMW Group. There are now more than 60 startups having become the alumnus of this program with their promising projects.

“The borderline between technology startups and automotive enterprises is blurring.” Said Riedl. He mentioned some of the cases he worked on with tech startups to TechNode reporter, for example the experiment of long-distance remote control under 5G networks with AI technologies.

“China market has always been highly-valued by BMW Group as the biggest single market for us and with its leading position now regarding autonomous driving technologies.” Based on a market forecast research conducted by IHS Markit, China would contribute over 14 million sales volume of autonomous driving cars by 2040, which is about 44% of global market share. China is highly possible to become the biggest market for autonomous driving cars.

“BMW Group always has continued and will continue expand China market and adapt its open innovation strategy here as we always did.”

China has renewed its offensive against apps that incorrectly collect data, taking offline around 100 apps in an investigation targeting numerous industries including the banking and e-commerce sectors.

Why it matters: China authorities are cracking down on apps that over-collect personal information as internet companies’ failures to protect users persist and data theft remains a widespread issue.

• The government this year set up a task force to combat the mishandling of personal data in apps.
• Overcollection and miscollection of personal data are putting Chinese internet users at risk, a high profile non-profit cybersecurity center said earlier this year.

Details: China’s Ministry of Public Security (MPS) has removed the apps and ordered that issues be “rectified” in cases where apps over-collected data, did not have privacy agreements, or were unclear about the data that they collected.

• Sixty-three apps received warnings and 27 were ordered to rectify problems on their platforms. Meanwhile, 10 companies were fined and two are under criminal investigation.
• The MPS has punished nearly 700 apps in the second half of the year for illegal personal data collection.
• Apps included in this round of crackdowns include China Everbright Bank, Bank of Tianjin, e-commerce services Weidian and Kaola, and online housing rental platform Fang.com.

Context: Data overcollection and information breaches have become a significant issue in China, where the market for illicit information is booming.

• In August, China’s National Computer Network Emergency Response Technical Team (CN-CERT) warned that the illegal use of personal information had become “a prominent issue.”
• The cybersecurity center said that 30% of all apps it investigated in its first-half report requested smartphone privileges the apps didn’t need to function.
• A significant number of apps displayed “abnormal behaviors,” the organization said, including detecting other applications on a phone or requesting permission to read and write files.

China’s internet population at risk as apps collect too much data: CN-CERT

Artificial intelligence (AI) firm Megvii has delayed its Hong Kong listing until next year following additional queries from the stock exchange as it prepares to go public, Nikkei Asian Review reported.

Why it matters: Megvii was one of several Chinese AI companies added to the American so-called Entity List in October for alleged complicity in human rights violations in China.

• The world’s most valuable AI startup Sensetime, speech recognition firm iFlytek, surveillance equipment manufacturer Hikvision, and AI company Yitu were also included in the blacklisting.
• The ban has investors worried as it effectively bars the companies from doing business with American firms, cutting them off from purchasing US-made components.

Details: Megvii had initially timed its initial public offering (IPO) to take place before the end of the year. However, the company decided to push the date to next year after additional scrutiny from the Hong Kong stock exchange, according to separate reports from Nikkei Asian Review and International Financing Review.

• The company was questioned about the adequacy of its risk disclosures related to US sanctions in its IPO filing.
• Megvii filed for a Hong Kong listing in August but was mulling a delay prior to queries from the bourse.

Context: Megvii was expected to become the first of China’s AI startups to go public. The company would have acted as a litmus test of sorts, paving the way for other companies in the industry.

• Megvii has also faced scrutiny in Taiwan, where the government planned to investigate the company following the ban after it was awarded a contract to install a security system at Taichung Power Plant.

Bottom line: Potential investors are hesitant about buying shares in Megvii after the blacklisting. The company may have trouble hitting a $3.5 billion valuation, a source previously told Bloomberg. The company was valued at $4 billion in its latest funding round.

People in China will need to undergo a facial recognition scan when buying new SIM cards, according to rules introduced on Sunday, as the country seeks to tackle telecommunications fraud and improve cybersecurity.

Why it matters: Facial recognition is ubiquitous in China, with applications ranging from payments to public security.

• Nevertheless, the technology’s increased presence has been met with pushback as some question whether it is being overused.
• In November, a university professor from Zhejiang province in eastern China filed a lawsuit against a wildlife park which required using its facial recognition system to access the facility.
• The measure further limits online anonymity under China’s real-name verification system by implementing additional identification checks.

Details: The rule ensures that internet personas are tied to real identities as online platforms typically require users to register their phone numbers when signing up for services requiring real-name verification.

• China’s Ministry of Industry and Information Technology (MIIT) announced the rule in September, requiring enforcement of the new measure on Dec. 1.
• The move aims to prevent SIM card resales and to crack down on telecommunication fraud, as well as improve cybersecurity and anti-terrorism campaigns, according to MIIT.
• Previously, prospective mobile service buyers were only required to present their identity cards when registering for new SIM cards.

Sensetime-led consortium to set up standards for facial recognition tech

Context: China last month set up a working group for facial recognition standards that aims to assuage concerns over data security issues surrounding the technology.

• The group is led by artificial intelligence startup Sensetime, which the US has blacklisted along with several others over their alleged complicity in human rights violations in China.
• Sensetime said in a statement that the group would also participate in international standard-setting.
• Meanwhile, companies including surveillance equipment manufacturer Dahua Technology, China Telecom, and ZTE have been proposing new international standards for facial recognition, video monitoring, and surveillance at the United Nation, the Financial Times reported.

Alibaba Cloud, a subsidiary of Chinese e-commerce giant Alibaba, has opened to the public its source code for an in-house machine-learning platform that it used to drive product recommendations during this year’s Singles Day shopping festival.

Why it matters: Alibaba has sharpened its focus on open-source software since 2011. The company’s cloud division is a member of the Linux Foundation and is active in a number of open-source communities including the Apache Software Foundation.

• Against the backdrop of the Sino-US trade war, China has been criticized for relying on American frameworks for artificial intelligence (AI) and machine learning.
• AI and machine learning is a collaborative movement and Alibaba Cloud joins a number of global internet firms which have released open-source platforms. It also stands to benefit from allowing more people to work on the platform, potentially improving it.

Details: Dubbed Alink, the platform offers a range of algorithm libraries that allow for processing live data as well as batched datasets, Alibaba Cloud said in a statement on Thursday.

• Alink facilitates tasks including statistical analysis, machine learning, real-time prediction, personalized recommendations, and anomaly detection.
• Alibaba has been using the platform across its businesses for the last three years. It said Alink helped increase the click rate of product recommendations on online marketplace Tmall by 4% during this year’s Nov. 11 Singles Day shopping festival.
• The platform is built on Apache Flink, an open-source framework for handling big data at large scale.

“The difference between Alink and the pure AI platforms like Tensorflow and PyTorch is that those focus more on the algorithms and the design of the models. But today, for machine learning models to train effectively, we need to have a high-quality connection to the big data. Alink provides us with a seamless connection between the AI algorithms and the big data distributed systems.”

—Jia Yangqing, president and senior fellow of Data Platform at Alibaba Cloud Intelligence to TechNode on Thursday

Context: The State Council, China’s cabinet, has set ambitious goals for the country to become a global leader in AI by 2030. As a result, China has applied AI across industries, permeating every facet of daily life.

• Nevertheless, the country lags behind in terms of talent and semiconductor development—the tools that provide the computing power that enables machines to learn from vast quantities of data.
• Alibaba is not the only Chinese tech giant to open source its machine learning tools. Baidu has opened up its Paddle Paddle deep-learning framework, a tool that was also used internally across its product offering.

A consortium of Chinese technology companies has banded together to establish standards for developing facial recognition technology, as concerns grow with the technology’s increased ubiquity.

Why it matters: Facial recognition has become part of everyday life in China, with applications in sectors as far-ranging as public security to retail.

• Nevertheless, its use has sparked heated debate, with some arguing that the technology is being applied to scenarios for which it is unneeded.
• Earlier this month, a university professor from China’s eastern Zheijiang province filed a lawsuit against a wildlife park over being forced to use its facial recognition system to access the facility.

Details: The working group was established on Nov. 20 and is made up of companies including social media and gaming giant Tencent, Alibaba-affiliate Ant Financial, smartphone maker Xiaomi, voice recognition firm iFlytek, and surveillance equipment manufacturer Dahua Technology, among others.

• The group is led by Sensetime, the world’s most valuable artificial intelligence (AI) firm. The US placed the company on a trade blacklist last month over alleged complicity in human rights violations in China.
• The consortium’s aims are to standardize the research and development of facial recognition technologies, ensure safety in its use, and promote “healthier” development of the industry, according to a Sensetime statement.
• The group will also lead and participate in setting up international standards, the company said.
• The move comes following concerns over biometric data theft and a lack of accuracy in properly identifying individuals.
• Sensetime said data leaks come as a result of a lack of specifications for collection, storing, and processing facial data.

Context: Despite the convenience that facial recognition technologies bring, the fallout could be disastrous if facial data falls into the wrong hands.

• For example, a password can be changed if it is compromised while physical features cannot be easily modified if facial data is stolen.
• While a vast majority of commercial applications are opt-in, the Chinese government has increased its focus on using the technology in its vast surveillance apparatus.

Chinese smartphone maker OnePlus has suffered a data breach involving its customers’ order information, the company said in a statement without disclosing how many users have been affected.

Why it matters: The incident is the second time in two years the smartphone maker has suffered a security breach. In January 2018, OnePlus reported that credit card data for up to 40,000 of its users had been stolen.

• The company last year became one of the top five global smartphone brands in the premium bracket, growing off the back of demand for its OnePlus 6T smartphone in India, China, and Eastern Europe, according to Counterpoint Research.

“We have discovered that some of our users’ order information was accessed by an unauthorized party. Impacted users may receive spam and phishing emails as a result of this incident.”

—OnePlus in a statement

Details: OnePlus said that information including customer names, contact numbers, and email and shipping addresses may have been accessed by an “unauthorized party.” The company did not disclose how many users were impacted but said that “payment information, passwords, and accounts are safe.”

• OnePlus downplayed possible effects of the breach, saying its users may receive more spam following the incident.
• The company said it is working with “relevant authorities” to investigate the incident.
• OnePlus will partner with a “world-renowned security platform” and set up a bug bounty platform to prevent incidents of this sort in the future.
• However, citing the company’s 2018 breach, several users said the company should have done more to secure their data.
• OnePlus has sent emails to users affected by the breach to inform them that their information may have been compromised, the company said.

Context: In 2018, OnePlus reported that it had been attacked and around 40,000 users had their credit card information compromised. The company then temporarily shut down credit card payments on its website.

• Data breaches are of rising concern in China as an increasing number of the country’s residents move online, generating huge amounts of data that could fall victim to malicious attacks.

China is looking to introduce rules that could affect the way cybersecurity researchers in the country disclose vulnerabilities, requiring them to report issues to authorities before making them public, according to draft regulations published this week.

Why it matters: The changes limit media from publishing disclosures before they have been reported to authorities, potentially delaying how quickly the affected individuals and companies are notified.

• The regulations, currently open for public comment, form part of China’s 2017 Cybersecurity Law, and specify that disclosures should not endanger “national security and public interests.”
• The move comes following a series of offensives against apps that violate user privacy by over-collecting data, including those from a slew of peer-to-peer lenders.

Details: Vulnerability disclosures cannot contain source code for viruses, trojans, or any form of ransomware, as well as methods of breaking into or disrupting networks, according to internet regulator, the Cyberspace Administration of China.

• In addition, no information that could lead to cyberattacks being copied should be included. No stolen data or information about a compromised network can be published.
• The proposed rules would also limit discussions at cybersecurity conferences, forums, or contests, as it bars public discussion of hacking methods and intrusion tactics before official disclosures are made.
• Organizations cannot publish public disclosures that include “warning” in their titles without getting government approval, the regulator said.
• The draft is open for public comment until Dec. 19.

Dust has yet to settle two years after China’s landmark cybersecurity law

Context: Vulnerability disclosures are an important part of improving cybersecurity, and prompt warnings to individuals and businesses are integral to containing the damage.

• China has seen a number of high-profile data leaks this year, ranging from open databases containing data about the country’s internet cafe goers to more sensitive lapses in security involving medical information.
• Security vulnerabilities have led to a huge market for illicitly obtained data in China, where it is not only relatively easy to obtain but also comes cheap.

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China’s electric vehicle (EV) market has seen a four-month slump in deliveries since purchase subsidies were slashed over the summer. The move has left the industry reeling, while startups battle for funds and investors become increasingly wary.

“The whole industry obviously has seen a significant slowdown after the subsidy cuts,” Brian Gu, Xpeng president and vice-chairman told TechNode at TechCrunch Shenzhen this month.

EV subsidies are expected to decrease by a further 50% next year, and completely disappear in two years. The Chinese government has sought to counter automakers’ reliance on the subsidies to sell their vehicles, hoping the reduction will force these companies to innovate.

Despite mounting troubles in the industry, Xpeng recently closed its $400 million Series C. “We need a war chest to tackle the Chinese consumer market in order to build up our brand,” Gu said. “We have a lot of things planned, and we see this capital as being instrumental in achieving these goals.”

Founded in 2014, Xpeng is one of the few EV makers in China that has begun delivering vehicles. The company launched its first car, the G3 SUV, in 2018, subsequently releasing an enhanced version with a longer driving range. Xpeng also plans to begin deliveries of its P7 sedan in the second quarter of 2020.

Meanwhile, rival Chines companies Nio and Byton have struggled to secure new funds amid a macro-economic slowdown and flagging auto market. Nio has yet to finalize a RMB 10 billion ($1.42 billion) deal with Beijing E-T0wn, a state-backed capital fund, that the company announced in May.

Gu believes that the government’s investment in charging infrastructure and a focus on innovation will help the industry reach an “inflection point,” where EVs become more competitive than gas-driven cars.

“We would like to see the industry become more product-focused, competing on product merit rather than just subsidy levels,” he said.

With contributions from Chris Udemans

Artificial intelligence (AI) firm Megvii plans to seek approval for its Hong Kong listing on Thursday, aiming to raise at least $500 million, Reuters reported citing people familiar with the matter.

Why it matters: In October, the US government added Megvii to the so-called “Entity List” for alleged complicity in Beijing’s human rights abuses in China. The move effectively blocks the company from sourcing American-made components for its products.

• Megvii has denied the allegation and said its inclusion on the list comes as a result of a “misunderstanding.”
• The company’s initial public offering (IPO) has been delayed as a result of the US-China trade war and blacklisting.

Details: Megvii was previously seeking a fourth-quarter listing of up to $1 billion, according to Reuters.

• The company has yet to decide whether to carry out a roadshow once the application is approved, the people said.
• Goldman Sachs said after Megvii’s blacklisting that it was re-evaluating its involvement in the IPO given “recent developments.”
• The company filed for a Hong Kong IPO in August but gave no indication of how much it was seeking to raise.

Context: Megvii is one of a handful of startups that is spearheading China’s AI boom, including Sensetime, Yitu, and Cloudwalk, though none have yet gone public.

• These companies have benefited from broad government goals to build China into an AI front-runner by 2030.
• The company earns nearly three quarters of its sales from AI services for government agencies and the healthcare industry, among others.
• In May, Megvii raised $750 million in a round led by Bank of China’s equity arm, valuing the company at more than $4 billion.

Biometrics firm Megvii’s contract in Taiwan at risk after US blacklisting

Electric vehicle (EV) maker Nio has appointed a former auto analyst as the company’s new chief financial officer, the automaker announced on Sunday, replacing Louis Hsieh who left unexpectedly in October citing personal reasons.

Why it matters: Hsieh was key in taking Nio public in New York last year, and his resignation led to much speculation about why an important figure would leave the company in the midst of a search for new investment.

• Chinese media reported at the time that Hsieh’s departure could signal a new financing deal that required the CFO to be replaced. Nio declined to comment on the matter.
• Nio has yet to finalize a deal with state-backed capital fund Beijing E-Town, which the company announced in May alongside its financial results.

“[Feng Wei’s] financial and operational experience in the automotive-related fields, together with an impressive track record in equity research, makes him an excellent choice to lead our finance teams.”

—Nio CEO and founder William Li in a statement

Details: Prior to joining Nio, Feng Wei was an auto analyst at China International Capital Corporation (CICC). His appointment at Nio is effective starting Monday.

• Feng joined CICC in 2013 as a senior associate but quickly climbed the ranks to head automotive research. He holds a bachelor’s degree from Tsinghua University in Beijing and a joint master’s from RWTH Aachen University in Germany and Tsinghua University.
• He has worked for companies including Everbright Securities and German automotive manufacturer ZF Group.

Nio shares surge on October delivery figures

Context: Feng’s arrival comes as Nio attempts to keep its head above water as conditions in China’s auto market become increasingly difficult. EV sales continue to slide in the second half of the year after the government did away with subsidies for buyers over the summer.

• Officials in China’s eastern Zhejiang province deemed Nio “too risky” for an investment, ending talks with the company to build a manufacturing plant in Huzhou.
• In September, Nio announced plans to reduce its headcount to around 7,700 by the end of the year from almost 10,000 in January, as it sought to assuage investor concerns after disappointing second-quarter results.

A US congressional advisory body has warned that China’s focus on developing artificial intelligence (AI) could have marked effects on the global economic and military balance, shifting the seat of power from America to China.

Why it matters: Beijing has set ambitious goals to become a world leader in AI by 2030. Sensetime, the world’s most valuable AI startup, comes from China.

• Nevertheless, the country faces a slew of challenges in reaching this goal. While China’s internet population generates gargantuan amounts of data that can be used to train an AI, its domestic chipmaking sector, which the AI industry relies on, is largely inferior.
• Likewise, China is known for quickly implementing AI applications but lacks talent compared with the US.

“Chinese firms and research institutes are advancing uses of AI that could undermine US economic leadership and provide an asymmetrical advantage in warfare.”

—US-China Economic and Security Review Commission 

Details: China is prioritizing AI as it underpins the development of many other technologies, and could lead to “substantial scientific breakthroughs, economic disruption, enduring economic breakthroughs, and rapid changes in military capabilities,” the US-China Economic and Security Review Commission said in its 2019 report released on Thursday.

• The commission was set up in 2000 to evaluate the national security implications of economic ties between the US and China.
• China’s military strategists see AI as a “breakout technology” that could develop tactics to exploit US vulnerabilities, the report said.
• China’s policies on civil-military fusion seeking to leverage private sector innovation for the defense sector are worrisome for the US given the breadth and opacity of the campaign, the commission warned.
• Washington is concerned that the close collaboration between China’s military and private sector, which in turn works with US companies, could give China a leg up in a global arms race.
• The body highlighted China’s advantages in manufacturing, which could allow the country beat out the US in commercializing mass market and military discoveries made and funded in America.

Context: In the midst of the protracted US-China trade war, several high-profile Chinese AI companies have found themselves in the crosshairs.

• In October, the US barred Sensetime, as well as surveillance equipment manufacturer Hikvision and AI firms iFlytek and Yitu, among others, from doing business with American firms, effectively cutting off their supply of US-made components.
• Meanwhile, US-based think tank, Center for Data Innovation, has warned that the close ties between China’s military and private sector could hurt the country’s goals of becoming a world AI leader as distrust of companies linked to China’s government grows against the backdrop of US-China trade tensions.

China’s ‘military-civil’ partnerships could hurt its AI ambitions: report

Xpeng Motors has brought onboard smartphone maker Xiaomi as a strategic investor, as the Alibaba-backed new energy vehicle (NEV) startup announced $400 million in Series C funding.

Why it matters: Xpeng’s hefty haul comes against a macro-industrial backdrop of falling sales after subsidies for electric vehicles were cut over the summer, creating an increasingly difficult funding environment for NEV startups.

• Major players including Nio are struggling to get close to sales targets as NEV deliveries stalled in the second half of the year.
• Sales fell sequentially for three consecutive months beginning in July, while year-on-year rates of decline deepened from 4.7% in July to 34.2% in September.

“The business definitely needs capital to grow. It is a business that is still very much in the ramping up stage and we have to invest in research and development, in building our sales and services network, and completing our manufacturing plant, which we aim to have built by the end of this year. We have been working closely with Xiaomi on smart devices and they have the IoT leadership in China, and even globally, and smart auto could be a very good extension of the ecosystem.”

—Xpeng President Brian Gu, speaking to TechNode at TechCrunch Shenzhen on Tuesday

Details: Xiaomi is among a group of strategic and institutional investors to take part in the funding round. Xpeng also secured several billions of RMB-denominated unsecured credit lines from Chinese and commercial lenders including China Merchants Bank, China CITIC Bank, and HSBC.

• Company Chairman He Xiaopeng again invested some of his own funds in this latest round.
• Xpeng previously raised RMB 4 billion ($587 million) in Series B+ funding in August 2018, led Primavera Capital and Morningside Venture Capital, along with Chairman He.
  
• The Guangzhou-based NEV maker set out plans in June to raise new funding by the year-end.
• Xpeng Motors started delivering the 2020 version of its first mass-market SUV model, the G3, in September. The car features an NEDC range of 520 kilometers.
• Last month, the firm announced plans to expand its infrastructure through a partnership with TELD, the operator of China’s largest charging network.

Decline in China’s NEV sales sharper than expected: report

Context: China’s total NEV deliveries are expected to remain flat this year compared with 2018, according to a report from China International Capital Corp.

• CICC attributed the prolonged slump to consumer unwillingness to buy NEVs. Many have been put off by a spate of vehicle fires that took place over the summer.
• Xpeng plans to launch its second vehicle, the P7 sedan, next year, and begin deliveries in the second quarter.

“China’s artificial intelligence (AI) is like a kid with an IQ of 120. The US’ is a child with an IQ of 140. But in the US, the kid hasn’t left the laboratory,” according to Zhou Wei, founder and managing partner of China Creation Ventures.

Zhou said that China’s AI industry could overtake that of the US given the country’s move toward mass implementation of the technology and the fast rates of business model iteration.

“In the long run, the Chinese kid could outpace the US child,” he said during a fireside chat at TechCrunch Shenzhen 2019 on Monday.

Zhou’s comments come in the midst of a protracted US-China trade war, in which several high profile Chinese AI companies have been caught in the crosshairs.

The world’s most valuable AI startup Sensetime, as well as surveillance equipment maker Hikvision and speech recognition firm iFlytek, among others, were placed on a US trade blacklist last month for their alleged complicity in human rights violations in China.

Zhou’s sentiments echo those of Chinese AI expert and founder of Sinovation Ventures, Kai-fu Lee, who claimed previously that China mass-implementation of AI, access to data, and size of China’s internet population could put the country at the forefront of the technology’s development.

“Business models in China are iterated quickly, while Silicon Valley entrepreneurs and investors want to come up with a product that is perfect and doesn’t have too many problems,” Zhou said.

AI applications permeate every aspect of life in China, where it used from everything from facilitating facial recognition payments to keeping tabs on the country’s population and assessing potential risks related to loans.

The country has also become a haven for data production as internet users’ daily lives move online. For example, mobility services including bike-sharing and ride-hailing generate gargantuan amounts of data that can be used for training an AI. China’s biggest ride-hailing platform Didi recently released a transit dataset to help researchers in a push to better understand transport patterns and optimize infrastructure investments.

Nevertheless, China faces the prospect of a major brain drain, according to MacroPolo, a China-focused think tank at the Paulson Institute in Chicago. Around three-quarters of the country’s AI talent is currently located outside of China, the research body found for its analysis of submissions to the NeurIPS conference.

Speed is a requirement for companies in China, said Zhou, adding that whoever is fastest will be the winner. “China’s consumers are tolerant of new projects and also impatient,” he said.

Zhou noted that this fast aspect has also become a problem for venture capital firms, who can struggle to keep up. “We’re really under a lot of pressure to learn quickly and to be very focused,” he added.

Ride-hailing giant Didi has backtracked on plans to impose gender-specific operating hours when relaunching its carpooling service Hitch later this month, following public outcry blasting the company for limiting women’s freedoms.

Why it matters: Didi suspended its Hitch service indefinitely last year following two separate incidents in which drivers on the platform raped and murdered their female passengers.

• The murders sparked outrage from the public and prompted regulators to launch an industry-wide crackdown aimed at improving safety in the ride-hailing industry.
• Shortly after the incidents, China’s transport ministry lambasted Didi, saying the company had “lost control” of its drivers and vehicles.
• The company has subsequently launched and upgraded a series of safety features and introduced more stringent background checks for its drivers.

Didi to restart operations of its carpooling service Hitch

Details: Didi on Wednesday announced that it would relaunch Hitch on a trial basis later this month, more than a year after suspending the service.

• However, while men would be able to use the service between 5 a.m. and 11 p.m., women would not be permitted to hail Hitch rides after 8 p.m.
• The move prompted widespread pushback on social media, with female users calling the practice unfair.
• Responding to the criticism, Jean Liu, Didi’s president, said in a post on microblogging platform Weibo on Wednesday that the current rules for Hitch are “not useful to women,” but added that the trial will function as a safety test.
• A day later, Didi said in a statement that it would standardize operating hours from 5 a.m. to 8 p.m. for all users, thanking netizens for their feedback.

Context: Didi has faced scrutiny in the past for allowing sexist practices to creep into its services.

• In an early iteration of its Hitch service, drivers were able to review passengers, a feature that was often abused to include inappropriate comments about a riders’ body and looks.
• Didi has struggled with the fallout of last years’ murders, pivoting from pushing for growth to an increased focus on safety.
• The focus on safety has had a significant effect on the company, resulting in reported losses of nearly RMB 11 billion ($1.6 billion) in 2018.

Search giant Baidu beat analyst expectations for its third quarter revenues as the company’s diversification away from its core search business showed signs of paying off.

Why it matters: Baidu has seen increased competition for advertising revenue from rivals including Bytedance and Tencent in the midst of a macroeconomic slowdown that has led advertisers to tighten their belts.

• Baidu has had a tough year—the company’s share price fell by more than 35% prior to its latest earnings release.
• The search giant this year posted its first quarterly loss since listing in 2005.
• Baidu CEO Robin Li warned in January that “winter is coming,” acknowledging the effects of China’s slowing economy and the fallout from the trade war with the US.
• The company has since implemented numerous cost-cutting measures to mitigate risks to its business.

Details: Baidu’s Q3 revenue reached RMB 28.1 billion (around $4 billion), beating analyst expectations of RMB 27.5 billion. Revenue was up 7% compared with the second quarter.

• The company posted a net loss of RMB 6.4 billion. Baidu made a profit of RMB 12.4 billion during the same period last year.
• The company, in part, attributed the losses to its investment in online travel agency Trip.com, whose share price has declined, according to Baidu. In October, Baidu reduced its holdings in Trip.com, selling $1 billion of its shares.
• Q3 revenue from Baidu’s video-streaming platform iQiyi increased 7% compared with the same quarter a year ago, reaching RMB 7.4 billion, boosted by 31% year on year growth in subscribers to nearly 106 million.
• While iQiyi’s subscription revenue increased, the platform’s advertising sales shrunk as a result of increased competition, Herman Yu, Baidu’s chief financial officer, said during the company’s earnings call.
• Meanwhile, online marketing revenue fell by 9% compared with the same period last year as competition and the slowing economy took their toll.
• Baidu expects revenues of between RMB 27.1 and RMB 28.7 billion in the fourth quarter, representing growth of -1% to 7%.
• Baidu’s share price rose 4% in after-hours trading on Wednesday.

Context: Baidu has plowed billions into diversifying its offerings, particularly on artificial intelligence and cloud computing, and is looking to enterprise services for growth.

• Nonetheless, several of these investments, most notably its bet on autonomous driving, have yet to pay off. It’s likely that the company’s focus on self-driving cars will only begin to bear fruit in the next five to 10 years, putting additional pressure on its other businesses.

Ride-hailing giant Didi will resume operations of its carpooling service Hitch on a trial basis this month, the company announced on Wednesday. The relaunch comes a year after Didi suspended the service indefinitely over safety concerns.

Why it matters: Didi halted its Hitch service last year after two separate incidents involving female passengers using the platform who were raped and murdered by their drivers.

• The first incident took place in May 2018 in China’s central Henan Province, with the second taking place three months later in Zhejiang, on the country’s east coast.
• Didi faced public outcry and government censure after the incidents, leading it to halt the carpooling service.
• The murders led China’s transport ministry to say that the ride-hailing giant had “lost control” of its drivers and vehicles.
• Didi subsequently introduced more stringent background checks for its drivers and underwent a round of restructuring to increase its focus on safety.

Details: Operations of the rebooted service will be limited to seven cities, including Beijing, eastern China’s Nantong and Changzhou, and the northern cities of Harbin and Taiyuan, among others.

• Nevertheless, usage of the platform is limited to between 5 a.m. and 11 p.m. for men and 5 a.m. and 8 p.m. for women. It is unclear how this will be enforced.
• Trips are not permitted to exceed 50 kilometers and are restricted to metro areas.
• The company also announced that it would be piloting a “women’s safety program,” which includes using models that identify high-risk scenarios and trip anomalies. Didi plans to roll out the features to its other services in the future.

Context: Didi has removed more than 300,000 unqualified drivers from its platforms following a government crackdown on the industry in the wake of the murders.

• Jean Liu, Didi’s president, said in July that the company planned to spend an additional RMB 2 billion (around $286 million) on safety enhancements in 2019.
• Didi reportedly lost RMB 10.9 billion last year as a result of subsidies and a clampdown on non-compliant drivers.

Artificial intelligence (AI) startup Megvii is considering whether to delay its Hong Kong listing despite plans to go public before year-end, Bloomberg reported.

Why it matters: Megvii was among several of China’s biggest AI firms added to the US government’s so-called Entity List in October, effectively blocking them from sourcing American-made components.

• The move has raised questions about the future of these companies, as some source components from US manufacturers, including Nvidia.
• Following Megvii’s blacklisting, Goldman Sacks, one of the IPO underwriters, said it was reevaluating its involvement in the company going public.
• Taiwan’s government plans to investigate the firm following the ban, after Megvii was awarded a contract to install a security system for the Taichung Power Plant.

Undeterred by US blacklisting, AI firm Megvii eyes end-year IPO

Details: Megvii is currently discussing with advisers whether to press ahead with the listing this month or postpone until the company is removed from the Entity List, sources told Bloomberg.

• Investors are worried about buying shares and Megvii may have trouble hitting a valuation of $3.5 billion, one of the people said. The company was previously valued at $4 billion after its last round of funding.
• The company still plans to hold its listing hearing in Hong Kong this month.
• Megvii said previously that it believes its inclusion on the blacklist was a “misunderstanding,” adding that the company would be “engaging with the US government on this basis.”

Context: Megvii was expected to become China’s first AI startup to go public, acting as a possible litmus test and paving the way for other companies in the industry to follow.

• The US blacklisting came after Megivii, along with the world’s most valuable AI startup Sensetime and surveillance camera manufacturer Hikvision, were accused of complicity in human rights violations against Muslim minority groups in China.
• Speech recognition giant iFlytek, as well rival AI startup Yitu and surveillance firm Dahua Technology, among others, were also added to the list.

Artificial intelligence (AI) startup Clobotics is looking to cash in on China’s massive wind energy boom, using its technology to automate turbine inspections that typically take up to six hours when done manually.

The backstory: Founded in 2016, Clobotics provides computer vision and data analytics solutions for the wind power and retail industries. The company aims to automate time-intensive processes through data analysis.

• With headquarters in Shanghai and Seattle, Clobotics has partnered with companies including Shanghai Electric, LM Wind Power, Coca Cola, Concord New Energy, and GEV Wind Power.
• The company was founded by executives from Chinese drone maker Ehang, including its former COO George Yan and Claire Chen, previously general manager of the company’s North American business.

Unique selling point: Clobotics claims to be able to complete inspections of wind turbines in 25 minutes, with the help of autonomous drones and its computer vision platform, a process that typically takes six hours when done manually. This could dramatically reduce labor costs and the amount of time a turbine is out of service during the inspection process.

• Clobotics’ computer vision module can detect defects as small as 1 millimeter by 3 millimeters, the company says.
• After an inspection is completed, images are uploaded to the cloud where the company’s analytics platform examines the imagery and identifies issues with the blades.
• The company has forged several major partnerships with key players in the power generation industry.
• Given the height of the turbines, automated solutions could dramatically decrease risks during inspections.

“We are committed to providing the best AI solutions to digitalize the traditional industries. When smart devices marry computer vision technologies, massive amounts of offline data are collected, recognized, and analyzed automatically through artificial intelligence.”

—Clobotics co-founder George Yan

The investors: Clobotics has attracted investors including GGV Capital, CDIB Capital, the overseas-focused investment arm of Taiwan-based China Development Financial, and CMC Capital. It most recently closed its $22 million Series Pre-B.

• The company has secured a total of $43 million in funding, according to data from Crunchbase.

Present condition: Clobotics is currently seeking to increase its market share in the US and Europe. The company this year partnered with GEV Wind Power, a company providing wind turbine maintenance services globally, expanding the Chinese startup’s reach to North America, Europe, and Africa.

• The company said shortly after its latest funding round that it would continue to seek growth in the US and European markets.
• Nevertheless, leaders in the wind industry have warned that the protracted US-China trade war could hurt the development of the industry as a whole, as insiders fear that the cost of wind turbines could increase due to protectionist policies.
• Meanwhile, the Chinese government has announced it will end subsidies for new onshore wind power projects by 2021.

The landscape: Drones have been used in inspections in the past, but Clobotics’ system includes autonomous drones that automate the process.

• The company currently has few homegrown competitors, as the majority of the inspections are done manually. Nevertheless, a US-based rival has moved into China through a domestic tie-up.
• California-based Sterblue has partnered with Chinese turbine inspection firm Winward to introduce its AI-based drone inspection platform to China.
• The market is huge and is set to grow further. China installed nearly 20 gigawatts of capacity in 2017 alone and is home to the biggest onshore wind farm in its western province of Gansu.
• The country will reach nearly 440 gigawatts of capacity by 2028, with onshore farms accounting for 84% of all new developments, research firm Wood Mackenzie said in a report from August.
• Around 410 wind turbines are needed to produce 1 gigawatt of power, according to estimates by the US’ Office of Energy Efficiency and Renewable Energy.

Prospects: Clobotics has in the past year seen increasing attention from new and old investors, closing two rounds of funding collectively worth $33 million. As developers rush to install new capacity before China drops subsidies in 2021, Clobotics could see a drastic increase in the adoption of its services.

The company has also not limited itself to the Chinese market, as it seeks to expand to offer its autonomous inspections globally and take advantage of the renewable energy boom that has arisen over escalating concerns over carbon emissions.

China is attempting to predict potential crimes using artificial intelligence (AI), employing the technology to monitor the emotional state of its citizens, the Financial Times reported.

Why it matters: China is the world’s largest surveillance market and is home to some of the world’s biggest equipment makers.

• Several prominent Chinese AI firms were last month added to a US trade blacklist for their alleged complicity in Beijing’s human rights violations in the northwestern Xinjiang Uyghur Autonomous Region.
• The blacklisting comprised a number of the country’s “AI Champions,” including Sensetime and Yitu, speech recognition firm iFlytek, and surveillance camera maker Hikvision.

“Using video footage, emotion recognition can rapidly identify criminal suspects by analyzing their mental state… to prevent illegal acts including terrorism and smuggling.”

—Li Xiaoyu, policing expert and party cadre from Xinjiang, cited by FT

Details: Emotion recognition was a hot topic at this year’s China Public Security Expo, the country’s biggest surveillance fair.

• Companies including Hikvision, search giant Baidu, and Huawei were among the 1,500 exhibitors.
• Emotion recognition is mostly being deployed at Chinese customs, where it is used to identify signs of nervousness, aggression, and the likelihood of attacking others.
• China is not the only country testing out emotion recognition capabilities, as companies including Google and Microsoft are also working on the technology.
• Nonetheless, experts say in its current state, the technology doesn’t work very well. “This technology is still a bit of a gimmick,” FT cited a popular Chinese tech blogger as saying.

Context: China’s surveillance capabilities have expanded rapidly over the past few years, with a focus on domestic stability.

• Eight of the ten most surveilled cities in the world are in China, according to a report by Comparitech, which provides resources for comparing tech services.
• The southwestern city of Chongqing came in at number one, with around 168 cameras per 1,000 people.

China’s state-backed hackers are targeting telecommunication companies using malware, allowing them to steal text messages and communications metadata en masse, cybersecurity researchers have found.

Why it matters: The hackers are part of a collective dubbed Advanced Persistent Threat 41 (APT41), which is unique among other Chinese groups as it uses tools typically reserved for espionage on operations that fall outside state control.

• The findings highlight an ongoing tug-of-war between Chinese hacking groups and their foreign rivals. An APT group from Southeast Asia was this year found to be targeting government employees in China by creating spoof email login pages.

“The use of Messsagetap and targeting of sensitive text messages and call detail records at scale is representative of the evolving nature of Chinese cyber espionage campaigns. APT41 and multiple other threat groups attributed to Chinese state-sponsored actors have increased their targeting of upstream data entities since 2017.”

—Researchers at FireEye

Details: The attack, dubbed Messagetap, is highly targeted and victims include political leaders, as well as military and intelligence organizations, according to US-based cybersecurity firm FireEye.

• Unlike similar attacks on telecom companies, this latest automates the process, gathering messages and metadata en masse.
• Hackers install the software on servers that telecom companies use to route SMS messages or store them if a subscriber is not available.
• The installed software searches for specific mobile phone or IMSI numbers, which identify individual devices and are used to verify users on a network.
• The attack allows hackers to parse message contents, IMSI numbers, and source and destination phone numbers.
• The system is also able to monitor keywords that are of “geopolitical interest,” FireEye said.
• FireEye did not disclose the names or locations of telecom companies affected by the attacks.

Context: APT41 not only conducts espionage operations but also engages in cybercrime for economic gain, which has helped the group hone its skills to support its state-sponsored operations.

• Meanwhile, hackers from outside of China have launched offensives against the country’s government officials and state-backed firms.
• APT groups are gaining worldwide attention, according to China’s National Computer Network Emergency Response Technical Team (CN-CERT). The organization said that the number of reports about these groups had increased by around 360% year on year in 2018.

If you can’t see the YouTube player above, try watching here instead. 

Electric vehicle maker Nio is looking to alleviate range anxiety among prospective car buyers by rolling out higher capacity batteries, supplementing its existing network battery swap stations.

Nio is one of China’s most visible electric vehicle makers and is often seen as the poster child for the sector nationally. The New York-listed company has had a tough year, as macroeconomic factors take their toll on China’s auto market, leading to an overall decline in sales.

TechNode tested Nio’s flagship SUV, the ES8, with the company’s newly released 84kWh battery. The upgrade extends the vehicle’s NEDC range from 355 to 425 kilometers. Nio began delivering the ES8 with the upgraded battery option in October. Previously the vehicle came equipped with a capacity of 70kWh.

The company believes the update can improve the competitiveness of the ES8, a vehicle that falls into the premium bracket, according to Nio founder William Li.

We approached the test from a consumer’s point of view, trying to ascertain how the vehicle would fare on a daily basis. Setting a popular culinary attraction on the outskirts of the eastern Chinese city of Suzhou as our destination, we put the new battery, Nio Pilot, and China’s charging infrastructure through their paces.

Nio Pilot functions, including automatic lane changing and automatic braking, worked well on highways and city streets. The system also includes warnings if you get too close to the lane markers, with haptic feedback in the steering wheel. The vehicle requires the driver to take over when it senses pedestrians in the road ahead. Not specific to Nio Pilot, we did at first find it difficult to trust in ADAS and its limitations.

Meanwhile, the battery performed well. The trip included a lot of highway driving, which typically requires more energy than travelling on urban roads.

There were problems, however. At times, Nio’s in-voice assistant required numerous calls to wake it up. While not an issue with the ES8, we also encountered problems with charging infrastructure in and around Shanghai. A number of public charging piles we attempted to use were broken or had cars parked in bays while not being charged.

With contributions from Jill Shen

China’s share of global artificial intelligence (AI) investment is shrinking amid ongoing trade tensions with the US and efforts to curtail Chinese firms’ access to American components, according to new research.

Why it matters: China hopes to become a world leader in artificial intelligence by 2030, according to a 2017 plan by the State Council, the country’s cabinet.

• China overtook the US in AI-focused venture capital investment in 2017. Nonetheless, it was unseated a year later as investments in American startups more than doubled.
• Several of the country’s biggest AI firms were placed on the so-called US Entity List, effectively blocking them from doing business with American companies.

“If the Chinese AI chipset industry starts to take over, that will be China’s opportunity to reclaim the top spot. Startups like Horizon Robotics, Cambricon Technology, Unisound, and Pony.ai seem to be unicorns in the making.” 

—Lian Jye Su, principal analyst at ABI Research, told TechNode

Details: AI investment in the US totaled $9.7 billion in 2018 compared with China’s $7.4 billion, according to ABI Research. In year-on-year comparisons, US investments in AI grew 120% while those in China rose 54%.

• The US-China trade war has resulted in “collateral damage” in AI investment in China, while blacklisting Chinese AI firms has temporarily halted AI development, according to the research.
• The US accounted for 52% of global AI investments in 2018, a figure that could rise to 70% this year.
• China’s traditional industries have also been slow to adopt AI given the relatively cheap labor costs. “This means less risk-taking in AI startups that are less mature,” according to ABI.
• Meanwhile, China’s startups face challenges expanding internationally as a result of differing regulations to their home market.
• Nevertheless, the country’s favorable policies and regulations are set to drive adoption in the region, the researchers said.
• China’s venture capital market is typically responsive to new directives from the government, and updated mandates could boost investment, Su told TechNode.

Context: In early October, Sensetime, iFlytek, Megvii, and Hikvision, among others, were placed on a US trade blacklist. A number of these firms said they don’t expect the move to have a significant effect on their businesses.

• Regardless, the ban cuts off supplies of US-made hardware to these companies, whose components are used inside their products.
• At the same time, the government has scaled back spending as macroeconomic factors take their toll. According to iFlytek’s latest earnings, growth for some of its businesses suffered as a result of belt-tightening across government and private sectors.

Fintech firm 360 Finance has set up a research institute aimed at developing technologies to improve privacy and digital security in the financial services industry.

Why it matters: The move comes as China doubles down on cryptography regulation, passing a dedicated law in the hopes of enhancing information security in cyberspace.

• The new law supports the research of cryptographic methods for privacy protection as data breaches and theft in China remains a widespread issue.
• Chinese regulators have clamped down on the financial services sector, increasing scrutiny on how user data is used and where it comes from.
• Police raided Hong Kong-listed 51 Credit Card’s office in the eastern Chinese city of Hangzhou after the company was accused of improperly acquiring client data from a Chinese bank.
• 360 Finance’s parent company, cybersecurity firm Qihoo 360, has not been free from controversy. In 2012, the firm was accused of stealing user information, an accusation it dismissed as being made up by competitors.

Details: 360 Finance’s Privacy Protection and Secure Computing Institute will be led by Shen Yun, the company’s chief data scientist.

• The dramatic increase in the availability of data, the increased diversity of data types, and the number of application scenarios will have an adverse effect on privacy and information security, Shen said in a statement.
• 360 Finance implements homomorphic encryption, which allows for computation on encrypted rather than plaintext data, and federated learning—creating centralized machine-learning models by running computations on a user’s device so personal data is not transferred in the process.
• The goal is to “open up data silos” while ensuring privacy protection to enable “data sharing and value transfer,” Shen said.

China passes new cryptography law, laying ground for digital currency rollout

Context: Data leaks remain a widespread issue in China even as the country imposes numerous laws and frameworks to protect consumer information.

• With an increasing portion of the country moving online, more data could potentially be at risk of falling into the wrong hands.
• Personal information also comes cheap. An investigation last year found that hackers were selling stolen personal information from internet users for as little as $0.01.

iFlytek’s net profit for the third quarter doubled year on year to RMB 184.1 million (around $26.1 million), coming shortly after the company was added to a US trade blacklist earlier this month.

Why it matters: iFlytek was one of several Chinese artificial intelligence (AI) firms included on the so-called US Entity List, effectively blocking the company from doing business with American firms without explicit permission.

• The ban will not have a significant impact on iFlytek’s operations and development, CEO and chairperson Liu Qingfeng wrote in an internal memo to employees shortly after the ban was announced.
• iFlytek is one of China’s national “AI Champions” alongside Sensetime and Hikvision—which were blacklisted at the same time—as well as Baidu, Alibaba, Tencent, and Huawei. These companies have been tasked with spearheading China’s AI efforts as it seeks to become a technological leader by 2030.

China closes ranks as AI firms join Huawei on US blacklist

Details: While third-quarter profit increased by 108%, the company’s revenues grew by just 13% year on year, iFlytek said in a filing to the Shenzhen Stock Exchange.

• Cash received from investments made up a substantial portion of its growth, reaching nearly $1.9 billion compared with $74 million during the same period last year.
• iFlytek’s revenue for the first three quarters grew by 24% year on year to reach RMB 6.6 billion.
• The company said macroeconomic factors have impacted the growth of some of its businesses as the government, banks, and private sector have tightened their belts.

Context: iFlytek focuses on natural language processing, speech evaluation, and speech recognition. The company says it has more than 70% share of the market in China.

• iFlytek provides several products, including translation and transcription services, to Chinese consumers. It also offers its voice recognition platform to China’s healthcare and education industries, as well as to the country’s judiciary.
• The company was included on the US Entity List for its alleged involvement in Beijing’s treatment of Uighur Muslims and other predominantly Muslim ethnic minorities in China’s northeastern Xinjiang Uighur Autonomous Region.

Shanghai-based artificial intelligence (AI) startup Emotibot has closed its $45 million Series B+, aiming to improve the emotion-sensing capabilities of robots in human-machine interaction.

Why it matters: The company lists social media and gaming giant Tencent, video streaming firm iQiyi, and robot maker UBTech as its partners.

• Emotibot also works with China Merchants Bank, China Minsheng Bank, and China Mobile, according to its website.
• The company provides its computer vision and natural language processing (NLP) capabilities, as well as visual and voice emotion-recognition services to the financial, e-commerce, call center, and smart device industries.

Details: Emotibot’s latest round was led by V Fund Management, Linfeng Capital, and an undisclosed strategic investor. Puhua Capital, Keywise Capital, and VC Keywise Capital also participated.

• Emotibot said it will use the latest investment for continued NLP research and to develop its Bot Factory service, a platform that allows companies to create their own chatbots.
• Huawei has built an employee service platform using Bot Factory, which allows its staff to query issues including reimbursements and IT problems.

Context: Emotibot focuses on building chatbots that are able to identify emotional responses in humans, which the company believes is the next step in the evolution of artificial intelligence.

• Founded in 2015 by former Microsoft director Kenny Chien, Emotibot raised $30 million in its Series B last year.
• In 2017, the State Council, China’s cabinet, laid out plans to become a world leader in artificial intelligence by 2030.
• Emotibot is one of a slew of companies hoping to profit from the country’s national ambitions.

Security-focused Chinese web browser Maxthon contains a vulnerability that could give hackers administrative rights on Windows computers, granting them control over an operating system, cybersecurity researchers have found.

Why it matters: Maxthon International, the browser’s developer, claims that 670 million internet users worldwide utilize its software as their default browser. TechNode was unable to verify the claim.

• The company had a market share of around 1% in China at the end of 2016 and has pushed gain traction in the international market since 2017.
• Maxthon has not been free from controversy. The company was previously accused of sending personal data from international users back to China, including browsing history and information about their computers.
• The company positioned its browser as being secure and private following Edward Snowden’s 2013 revelations that detailed actions of the US National Security Agency’s once-clandestine global data collection program.

Details:  The vulnerability could give malware, and thereby malware authors, administrative rights on Windows computers they have already infected and on which the browser is installed, researchers from US-based cybersecurity firm Safebreach said a report shared with TechNode. Administrative rights allow a user to install, modify, and delete software and files on a computer.

• A Maxthon spokesperson told TechNode on Thursday that the company works closely with security firms to “fix any issues,” adding that the vulnerability alone “will not cause security problems but could be used as privilege breach in a carefully crafted security attack.”
• The vulnerability affects Maxthon 5 browsers, the latest major release by the company.
• The bug also could allow attackers to execute malicious code every time a computer is started up.
• The nature of the vulnerability makes it difficult for security products to detect, the researchers said.
• Safebreach reported to issue to Maxthon in September, with the company confirming its existence later that month, Safebreach said.
• Maxthon has issued a fix in a beta version of the browser, with an official release being pushed out this week, the company wrote in an email.

Context: In 2016, Polish researchers found that Maxthon browsers sent details about users’ operating systems, homepages, web and search history, and installed applications back to servers in China, albeit in encrypted form.

• Despite the encryption, the researcher said that the data could be intercepted while in transit between a user and the company.
• Maxthon previously claimed that users could opt out of the data collection program, which the company said was aimed at improving its service. However, the researchers found that the data was collected even when users opted out.

The article has been updated to include a response from Maxthon. 

China’s biggest search engine Baidu is optimistic about its investments in artificial intelligence (AI) despite the company’s recent financial troubles and increasing competition from domestic competitors.

Why it matters: Baidu has had a rollercoaster of a year, including seeing its share price fall by 36% year to date. The company posted its first quarterly loss in the second quarter since it went public in the US in 2005.

• In January, Baidu CEO Robin Li warned that “winter is coming” referring to the troubles from a slowing economy and the fallout from a prolonged US-China trade war. The company has since implemented a number of cost-cutting measures in an attempt to mitigate risks to its business.
• Nonetheless, Baidu is pushing forward with its AI ambitions, including its costly autonomous driving program after launching a robotaxi pilot in central China.

“Artificial intelligence will not destroy human beings but will give people eternal life… Everything every person has said and done, even people’s memories, emotions and consciousness can be digitally stored on network disks or the cloud. Machines can learn people’s way of thinking.”

—Li as cited in the South China Morning Post

Details: Li was speaking at the plenary session of the World Internet Conference in the eastern Chinese city of Wuzhen on Sunday. He believes that AI will bring revolutionary changes to how humans and machines interact and act as a force for good.

• The CEO said he is optimistic about AI’s effects on society, explaining that he expects the technology to improve people’s lives.
• Li said that Baidu’s robotaxi initiative in the central Chinese city of Changsha not only serves to develop the autonomous driving industry but also forces the transport infrastructure as a whole to upgrade, the SCMP reported.

Bytedance takes on Baidu with investment in Wikipedia-like Hudong Baike

Context: In 2017, the State Council, China’s cabinet, set out goals aimed at making the country a world leader in AI by 2030. Baidu was later named one of China’s “AI Champions” for its autonomous driving efforts.

• The company has made increasing efforts to pivot toward enterprise solutions, including cloud computing and AI, as competition in the consumer market increases.
• Baidu recently invested around $200 million in Neusoft Holdings in a move that could help the company scale its AI offering.
• Tencent and Bytedance pose a serious threat to Baidu in competition for revenue as advertisers tighten their belts.
• Bytedance this year launched a search engine and invested in Wikipedia clone Hudong Baike, a competitor to Baidu’s online encyclopedia, moving further onto the search giant’s turf.

Daniel Povey, former Johns Hopkins professor and developer of open-source speech recognition toolkit Kaldi, is currently in talks to join smartphone maker Xiaomi to develop a next-generation voice recognition platform for the company.

Why it matters: Xiaomi has sharpened its focus on its smart home ecosystem, which is typically controlled using the device maker’s smart speakers and voice assistant.

•  Johns Hopkins fired Povey after he broke into a student sit-in at the university in May with bolt cutters. The students reportedly locked themselves in the institution’s administration building to protest the university hiring a private police force to maintain order on campus.
• Johns Hopkins said Povey’s actions endangered the university’s students, which led to his dismissal.

“I am very close to signing an agreement to work for Xiaomi in Beijing. Would leave before end of 2019, and would hire a small team there to work on next-gen `PyTorch-y’ Kaldi.”

—Povey on Twitter

Details: Povey, an important figure in the speech recognition field, was originally hired by Facebook after his dismissal from the university. However, he eventually declined the posting when the social media giant added conditions to his contract due to the circumstances under which he left Johns Hopkins.

• Xiaomi was not immediately available for comment when reached by TechNode on Friday.
• In a post on his personal website dated August 16, Povey said that he was seeking opportunities to work for a “Chinese company and maybe get a part-time position at a Chinese university.”
• Xiaomi’s XiaoAi voice assistant is so far only available in Chinese, though Povey’s hiring may hint at the company seeking to expand functionality to other languages.
• The voice assistant had been activated 100 million times since its launch last year, the company’s CEO Lei Jun said in January.

Context: Xiaomi adopted a strategy this year dubbed “Smartphone + AIoT,” or artificial intelligence of things, as it expanded its connected device offering, hoping to combat a slowdown in China’s smartphone market.

• Voice control is central to this strategy as the company adds voice assistant functionality to an increasing number of devices, including washing machines and smart locks.
• Xiaomi said in its first-half results that the AI assistant has around 50 million monthly active users, up 88% year on year.
• Povey is a key developer of Kaldi, an open platform used by researchers and developers for speech-related applications.

Artificial intelligence startup Megvii will continue to seek a Hong Kong listing despite being blacklisted by the US earlier this month and is aiming for an early November listing hearing, Bloomberg reported.

Why it matters: Megvii filed for a Hong Kong initial public offering (IPO) in August following reported delays due to ongoing US-China trade tensions.

• The filing came after months of political unrest in the city, with companies including e-commerce giant Alibaba opting to wait in order to gauge investor sentiment following city-wide protests.
• After Megvii’s blacklisting, Goldman Sacks, one of the IPO’s underwriters, said it was reevaluating its involvement in the company going public.
• Investors could be discouraged from buying stock in a company that has been banned from doing business with US firms.
• The government of Taiwan is opening an investigation of the firm, which was awarded in September a contract to install a security system for the Taichung Power Plant, after the blacklisting.

Details: Megvii is currently seeking a listing hearing in November, people familiar with the matter told Bloomberg.

• While being added to the US Entity List, which effectively banned Megvii from sourcing products and components from American companies, has cut off Megvii off from an essential supply of chips from Nvidia, the company has not given up on its listing goals, the people said.
• Megvii said previously that its inclusion on the blacklist came as a result of a “misunderstanding,” adding that the company complies with all laws in regions in which it operates.
• Megvii cited being put on a US trade blacklist as a possible risk in its IPO prospectus. The company said that, should it be prohibited from procuring “certain goods and technologies,” its “ability to develop and provide solutions might be impaired.”

Biometrics firm Megvii’s contract in Taiwan at risk after US blacklisting

Context: Alibaba-backed Megvii provides its facial recognition technology to companies including smartphone maker Xiaomi and payments firm Ant Financial. The AI firm also supplies solutions for public security bureaus around China.

• Megvii was one of eight Chinese AI firms blacklisted by the US for their alleged complicity in human rights violations in northwest China’s Xinjiang Uyghur Autonomous Region.
• Other companies recently included on the list include Sensetime, the world’s most valuable AI startup, speech recognition and national language processing firm iFlytek, as well as surveillance camera makers Hikvision and Dahua Technology.
• A company IPO typically takes place five to eight weeks after receiving approval from the listing committee during the hearing, according to guidelines from corporate law firm Mayer Brown. Xiaomi passed its listing hearing on June 7, 2018 and floated its shares on the Hong Kong stock exchange on July 8, 2018.

China is the world’s largest investor in new energy vehicles (NEVs). For the past decade, the government has put its might behind developing electric cars, spending billions on consumer-facing subsidies to lower the upfront costs of these vehicles.

These subsidies made China the largest electric vehicle market in the world, growing 450% in the six years ending in 2015. Pure battery-powered cars seemed to be winning the race. With 75% of all NEV sales in the country between 2009 and 2015, they catapulted ahead of alternatives like plug-in hybrids (vehicles that use both electric and gas power).

This year, however, Beijing changed its tack. The government dramatically scaled back subsidies, forcing automakers to boost innovation and reduce reliance on government incentives.

The move immediately caused an industry-wide speed wobble. In July, the first full month since the cuts were imposed, sales of NEVs fell for the first time in two years. This was followed a month later by a steeper 16% decrease year-on-year.

Shift toward hybrids

Hybrid vehicles have never really taken off in China, despite worldwide support. These vehicles accounted for just 10% of the 1.5 million passenger vehicles that Toyota sold in the country last year.

Hybrids typically have not benefited from the government’s preferential electric vehicle subsidies, falling between the cracks of government support and public favor.

This year, the situation quietly began to change. The first major shift came from China’s dual-credit policy, the country’s complex point-based system requiring automakers to produce a certain number of NEVs. The Chinese government defines three types of vehicles as NEVs: pure electric cars, plug-in hybrids, and hydrogen fuel cell vehicles. Traditional hybrids are categorized as conventional internal combustion engine (ICE) powered vehicles.

For example, in one case, an automaker would be required to produce 20,000 electric cars for every 1 million traditional gasoline-powered vehicles in order to be awarded credits as part of China’s emissions-reduction policies.

This policy has now shifted to increase focus on hybrid vehicles, a dramatic move from Beijing’s initial goals. Under a modified version of the policy released by the Ministry of Industry and Information Technology (MIIT) in July, the target could be slashed by as much as 70% to less than 6,000 electric vehicles if one million vehicles produced by automakers are all hybrids.

Going even further, hybrids will be reclassified as “low-fuel-consumption passenger vehicles,” granting them more preferential treatment in the future, and differentiating them from both internal combustion engine cars and electric vehicles. Beijing aims to issue the updated regulation by year’s end after soliciting feedback from industry experts and the public.

What is compelling the government to make such a major shift? Well, China initially laid out an ambitious timeline to completely ban national production and sales of ICE vehicles, said Xin Guobin, deputy head of the MIIT, at a trade conference in late 2017. However, sales of NEVs have slowed substantially since last year, hit by the flagging economy as well as public concern over range problems and car safety.

Also, when compared with the volume of 240 million ICE vehicles nationwide last year, the 2.6 million NEVs currently on the road barely register, which makes fuel-efficient development more urgent.

More worryingly, Chinese OEMs took advantage of the policy, producing a low number of electric cars to achieve credits even as they sold gas-guzzlers without scruples. China’s average fuel consumption surpassed 7 liters per 100 kilometers in 2017, according to figures from the Innovation Center for Energy and Transportation (iCET). The think tank warned that if the situation continues unchanged, Beijing may not be able to meet their goal of 5 liters per 100 kilometers by 2020.

Subsidy cuts for NEVs

China’s subsidy policies go back as far as 2009. The country had been late to produce passenger cars, lagging behind the US, Japan, and Germany. With the development of electric vehicles, the government hoped to change this trend.

During that year, China’s state planner, the National Development and Reform Commission (NDRC), partnered with three other departments to kick off an ambitious financing plan paving the way for China to become a leader in NEV development and adoption. In 13 municipalities—including Beijing, Shanghai, southwestern Chongqing and northeastern Changchun—the government body laid the groundwork to roll out 1,000 electric vehicles for public services (including buses, taxis, and postal services) over three years.

Over the next several years, consumers benefited from generous government subsidies. A car buyer could save as much as RMB 60,000 (roughly $8,500) when purchasing a pure electric car. In 2015, the savings amounted to nearly a third of the price of a medium-level vehicle with a range of about 240 kilometers.

However, the government knew that they couldn’t support subsidies indefinitely. In late 2015, these grants were scaled back for the first time by 10%. This was followed by a further cut in 2016, which slashed the subsidy for a high-performance electric car by nearly 20% to RMB 44,000. According to a 2016 subsidy-reduction plan released by the Ministry of Finance (MoF), China planned another 40% cut by 2020.

The other shoe finally dropped in March of this year. The MoF announced its intention to completely do away with subsidies for EVs with a range of below 250 kilometers, starting in June. The incentive for high-performance electric cars was also slashed by 50% to just RMB 25,000. What’s more, the central government revealed plans to phase out financial support completely after 2020.

The upshot is that electric cars have become substantially more expensive for either the buyer or the manufacturer, depending on who absorbs the additional cost. For bigger manufacturers, dealing with a post-subsidy world could prove to be easier than for China’s numerous EV startups.

But there was a method to Beijing’s madness. After years of government subsidies, China has become home to scores of electric vehicle makers; as of this May, nearly 500 companies had registered as such. Yet most of them haven’t delivered a single vehicle to consumers, and experts believe the majority of these companies will go under as part of an accelerated process of Darwinian competition.

The situation is precarious even for the handful of startups that have managed to deliver vehicles. Once-promising EV stars, such as Nio and Xpeng Motors, have been beset either by customer complaints or a series of car fires. In fact, there has been widespread fear that the ballooning market may be at a risk of bursting, as manufacturers have become overreliant on the government, which holds them back from developing better vehicles on their own.

Amid flagging sales and waning consumer confidence, the government has realized that more time is needed for automakers to deal with key issues around driving range and battery safety. If China is ever to lead the world’s electric vehicle market, it could be a long and bumpy road.

Huawei’s revenue for the first three quarters grew by 24.4% year on year to RMB 610.8 billion (around $86 billion), the company said on Wednesday, showing little sign of slowing despite US sanctions earlier this year.

Why it matters: Huawei was put on a US trade blacklist in May, effectively blocking it from doing business with US companies.

• Huawei founder Ren Zhenfei previously said that the company had begun making 5G base stations without US technology indicating that ban has had a limited effect on its telecom business. Nevertheless, the company’s consumer business is expected to be worse hit.
• US President Donald Trump said this month the US would start granting select US companies permission to sell their products to Huawei, which may help cool tensions between the world’s two biggest economies.

“To date, Huawei has signed more than 60 commercial contracts for 5G with leading global carriers and shipped more than 400,000 5G Massive MIMO active antenna units (AAUs) to global markets.”

—Huawei in its earnings release

Details: Huawei shipped more than 185 million smartphones during the first three quarters, a 26% increase from the same period a year ago, the company said in a statement on Wednesday.

• Huawei said previously that the company expected US export restrictions to reduce annual revenue from its consumer devices business by $10 billion.
• As of the end of Q3, Huawei has partnered with 700 cities, 228 Fortune Global 500 companies, and 58 Fortune Global 100 companies, the telecommunications giant said.
• The company added that it also saw growth in other businesses including PCs, tablets, and wearables, without providing figures.
• Huawei did not provide figures for the third quarter alone.

The US move to blacklist Chinese artificial intelligence and surveillance companies has met with widespread condemnation in China despite the companies’ claims that the prohibition won’t have long-term effects on their operations.

On October 7, the US Commerce Department placed several high-profile Chinese AI firms and government agencies on the Entity List—effectively blocking them from doing business with American companies without prior approval.

The organizations include Sensetime, the world’s most valuable AI startup, and the speech recognition and natural language processing firm iFlytek, as well as surveillance camera makers Hikivision and Dahua Technology.

Also included are Alibaba-backed Megvii, which recently filed to go public in Hong Kong—the first Chinese AI startup to do so—and its counterpart Yitu.

In its statement, the Commerce Department said that the companies have been “implicated in human rights violations and abuses” in northwest China’s Xinjiang Uyghur Autonomous Region, home to predominantly Muslim ethnic minorities. According to US officials, the blacklisted companies were involved in creating the mass surveillance apparatus used to monitor minorities in the region.

Sensetime, Megvii, Yitu, and Hikvision all issued statements opposing the US decision, saying that they comply with Chinese laws. Megvii claimed its inclusion on the list was the result of a “misunderstanding.”

The US announcement came days before Chinese vice-premier Liu He’s visit to Washington to resume trade talks. The Commerce Department maintains that the ban is unrelated to the negotiations.

The blacklisting of these companies is a direct affront to China’s technological ambitions. The country has plowed billions of yuan into shifting its economy up the industrial value chain through the development of the robotics, electric vehicle, semiconductor, and AI sectors. Given that China’s goal is to overtake the US by becoming an AI frontrunner by 2030, the Commerce Department’s move appears to takes aim at that ambition.

While US human rights and pro-democracy groups applauded the export restrictions, the conversation within China has remained focused on the affected companies. Meanwhile, nationalistic fervor has reached fever pitch, with state media claiming the move is just the latest attempt by the US to undermine China’s rise.

Support at home

China swiftly hit back at the ban, saying that the human rights claims are “fact-distorting gibberish” that attempt to limit China’s counterterrorism efforts.

“Xinjiang does not have the so-called human rights issue claimed by the US. The accusations by the US side are merely made-up pretexts for its interference,” said Geng Shuang, China’s Foreign Ministry spokesperson, on Tuesday.

Meanwhile, state-backed Xinhua News Agency said the ban was aimed at “hindering China’s development,” rather than any real concerns over human rights.

The Global Times, a Communist Party mouthpiece, referred to the ban itself—as well as subsequent visa restrictions on Chinese officials believed to be involved in human rights violations in Xinjiang—as “shameful,” adding that the sanctions will have “little effect.”

Much of this rhetoric was mimicked on Chinese social media, where the majority of netizens put their support behind the homegrown companies.

“America is worried about the rise of great Chinese companies,” one user said, commenting on a statement published by Sensetime on the popular messaging app WeChat.

“Without the US Entity List, many people wouldn’t know that Chinese innovation is leading the way,” said another.

On Weibo, users attributed the ban to the perceived fear of China in the US.

“When the US wildly starts boycotting China, it shows China is powerful enough to scare them,” commented one user from eastern China’s Shandong province.

Meanwhile, the Washington-based NGO Freedom House saw the move as a long-awaited offensive against alleged human rights violations in Xinjiang.

The organization said in a statement on Wednesday that it “applauds” the decision, urging the US government to expand the export restrictions to encompass more companies involved in surveilling dissidents in China.

The Republican senator Ted Cruz, who—as part of a bipartisan coalition of US senators—has pushed for sanctions against entities suspected of involvement in human rights violations in Xinjiang, called the move an “excellent step forward.”

What next?

Despite the polarizing effect of the ban, the prohibition did not come as a surprise. Megvii, which provides its facial recognition technology to smartphone maker Xiaomi and payments firm Ant Financial, had alluded to the risks of a potential blacklisting when filing for its Hong Kong IPO.

“If we were subject to economic and trade restrictions, we could be prevented from procuring certain goods and technologies, and our ability to develop and provide our solutions might be impaired.” the company said in its prospectus.

Megvii cited Huawei as an example. Earlier this year, the Chinese telecommunications giant was added to the Entity List over alleged national security concerns related to the company’s technology.

Other companies, including iFlytek and Hikvision, began making contingency plans as far back as last year.

Hikvision said it had begun seeking alternative suppliers to limit its reliance on the US in late 2018, the same year that Chinese telecommunications giant ZTE was banned from sourcing American components for violating US sanctions against Iran and North Korea. ZTE has subsequently been taken off the blacklist.

In an internal memo to employees on Wednesday, iFlytek CEO Liu Qingfeng said the company had already made plans to deal with the situation, adding that he still expected positive financial results for the remainder of the year.

The overall impact on companies such as Sensetime, Megvii, and Yitu is likely to be limited. Megvii’s overseas business accounted for less than 5% of its total revenue during the first half of 2019. Sensetime and Yitu’s financial records are not currently available, as the companies have not submitted listing documents.

Nonetheless, being added to the blacklist could have severe reputational impacts. Chinese AI firms have established partnerships with universities around the world, which these academic institutions are now rethinking.

In June, prior to the export ban, the Massachusetts Institute of Technology (MIT) reportedly began reassessing its partnership with iFlytek as a result of the speech recognition firm’s technology being used in Xinjiang. The review came after Rutgers University severed its relationship with the company.

Just last week, MIT began reassessing its partnership with Sensetime after the firm was added to the blacklist. Sensetime has similar partnerships with research institutions as well as research centers and offices in Japan, Singapore, and the United Arab Emirates.

The effect on companies like Hikvision, which has become the largest supplier of surveillance equipment in the world, could be more pronounced. Around 30% of the company’s operating income currently comes from its overseas sales, according to figures for the first half of the year.

In addition, the company’s components are sourced from a vast array of US manufacturers, including Intel, Seagate, Nvidia, and Western Digital, according to John Honovich, the founder of IPVM, a video surveillance research company. But the company also has a number of non-US suppliers.

Nevertheless, Hikvision executives claim that the company’s reliance on US technology is “relatively low,” instead opting to use semiconductors from companies including Huawei’s chipmaking subsidiary HiSilicon, among others.

A popular Communist Party propaganda app could give Chinese government officials “superuser” access to any Android device on which the program has been downloaded, essentially providing access to all user files, new research has found.

Why it matters: The app, Xuexi Qiangguo, which roughly translates to “Study the Powerful Nation,” has garnered a massive following since it was released earlier this year.

• Shortly after its release, state media claimed the app had 100 million registered users.
• Chinese e-commerce giant Alibaba is reportedly the the app’s developer.
• The app allows users to read government news, watch short videos documenting Party theories, and take quizzes on Communist Party ideology.

“[The app] boasts technical capabilities that go well beyond what it purports to do, and maintains a level of access that no app would normally have over a user’s device.”

—The Open Technology Fund 

Details: Xuexi Qiangguo gives the government access to all of a smartphone user’s files and provides the ability to run commands on the device, including modifying files and installing software to log keystrokes, the researchers said.

• The study was conducted by the Open Technology’s Fund’s Red Team Lab and German cybersecurity firm Cure53.
• Xuexi Qiangguo actively scans for other applications on the phone and draws from a list of nearly 1,000 apps, including WhatsApp, Facebook Messenger, and Uber, among others.
• The app also collects detailed information including location, app usage, connection information, and data that identifies an individual device.
• The researchers said that the collected information is relayed to a server on a daily basis, while encryption is intentionally weakened, with weak cryptographic algorithms being used in areas that contain biometric and email data.
• It is unclear to what extent the superuser privileges are being exploited, the researchers said.

Context: The app was first released in January and rose to the top of Apple’s China App Store shortly after.

• Government employees are reportedly required to use the app regularly, but supervision on its use varies heavily between provinces and government departments.
• Nevertheless, some party members have found ways to cheat the system, leaving the app open during the day to increase their perceived usage. Meanwhile, others use software that automates usage in the app to appear as if it is being used regularly.

Speech recognition firm iFlytek’s operations and development will not be significantly affected by the company being included on a US trade blacklist, according to its chief executive officer.

Why it matters: iFlytek along with several other Chinese technology companies and government agencies were on Monday added to the so-called US Entity List, effectively banning them from doing business with American firms.

• The US Commerce Department said the blacklisting comes as the companies are “implicated in human rights violations and abuses” in China’s western Xinjiang Uigur Autonomous Region, home to predominantly Muslim minorities.
• Sensetime, the world’s most valuable AI startup, and surveillance camera maker Hikvision, as well as Megvii and Yitu, were also added to the list.
• iFlytek is one of China’s national “AI Champions” alongside Sensetime, Baidu, Alibaba, Huawei, and Hikvision, among others. These companies are tasked with spearheading China’s AI efforts as it seeks to become a technological leader by 2030.

Details: iFlytek chairperson and CEO Liu Qingfeng wrote in an internal memo on Wednesday that the company would appeal its inclusion to the Entity List, adding that the iFlytek would see healthy growth throughout the rest of the year.

• The company expects to report profits of between RMB 330 million and RMB 380 million in the first three quarters of 2019, up 50% to 73% year on year, according to documents filed to the Shenzhen Stock Exchange on Thursday.
• Liu said that iFlytek has made it possible for people to “communicate freely” using its translation services, with its products being used in 200 countries and regions around the world.

The Massachusetts Institute of Technology is rethinking its relationship with Chinese artificial intelligence firm Sensetime after the US government put the company and several of its counterparts on a trade blacklist over human right violations, Bloomberg reported.

Why it matters: Sensetime, the most valuable AI company in the world, was put on the US Entity List, effectively banning it from doing business with American firms.

• High-profile AI companies Yitu and Megvii and surveillance camera manufacturers Hikvision and Dahua were also placed on the blacklist.
• US officials said the ban was as a result of the companies’ complicity in human rights violations in western China’s Xinjiang province, home to a large population of Chinese Muslims.

“MIT has long had a robust export controls function that pays careful attention to export control regulations and compliance. MIT will review all existing relationships with organizations added to the US Department of Commerce’s Entity List, and modify any interactions, as necessary.”

—MIT in an email to Bloomberg

Details: Sensetime said shortly after being blacklisted that it was “deeply disappointed” with the decision and that it complies with regulations in the countries in which it operates.

• Sensetime wouldn’t be the first Chinese company with which MIT has cut ties. After the Trump administration targeted telecommunications giants Huawei and ZTE, the school cut ties with the companies, adding that it had put in place new standards for projects that involved China, Russia, and Saudi Arabia.
• MIT said last year that Sensetime would become the first company to join a newly minted MIT Intelligence Quest initiative, which aimed to advance research into human and machine intelligence.

Bottom line: Sensetime has been pushing to create a globalized business, opening offices or research centers in countries including Japan, Singapore, and the United Arab Emirates. A trade ban could severely tarnish the company’s reputation, and limit its ability to forge partnerships and recruit new talent.

Chinese hackers have launched a broad campaign against international minority groups, nongovernmental organizations, and governments, distributing weaponized documents through email, cybersecurity researchers say.

Why it matters: The group, dubbed Mustang Panda, is an advanced persistent threat (APT) group, typically state-backed hackers involved in long-term clandestine espionage campaigns.

• The latest offensive has run since November 2018 and covers a wide range of governmental and private sector targets.
• China’s state-backed hackers often target countries and industries that are strategically important, including nations that form part of China’s Belt and Road Initiative and sectors aligned with the country’s technological development goals.

“The lure documents are themed to be relevant to their targets, and in some cases are copies of legitimate documents that are publicly available… The use of United Nations’ documents regarding activities in the Middle East may also be indicative of think-tank targeting.”

—Researchers at cybersecurity firm Anomali

Details: Anomali identified around 15 different documents created or used by Mustang Panda, which range from malicious files claiming to come from the Vietnam government to others that impersonate documents from religious organizations.

• Mustang Pandas targets include the Shan Tai, a Southeast Asian minority group, whose members are primarily Theravada Buddhists, the Communist Party of Vietnam, people interested in the United Nations’ Security Council Committee’s resolutions relating to the Islamic State in Iraq and the Levant, and China Zentrum, a German non-profit, among others.
• The researchers were able to link the campaign with Mustang Panda by analyzing tactics that both have in common.
• Anomali said that the distribution method of the documents has not been confirmed, though it is likely to be part of a spearfishing campaign, an email scam that targets specific individuals or organizations.

Context: Mustang Panda’s broad range of targets is noteworthy since China’s APT groups are usually specific in their focus. For example, APT19 focuses on espionage in the legal and investment sectors, while APT40 typically targets Belt and Road nations.

• A number of these groups focus on sectors that China hopes to develop, with the primary goal of aiding in the country’s technological advancement. These groups have been accused of targeting foreign firms to steal intellectual property.

Baidu will sell $1 billion of its stake in popular Chinese online travel agent Ctrip as competition for advertising revenue intensifies amid an economic downturn.

Why it matters: Baidu is turning its focus to artificial intelligence, autonomous driving, and cloud services as part of a general trend to offer more enterprise-facing services.

• Diversification into these areas will require heavy investment, Baidu CFO Herman Yu said in an earnings call earlier this year.
• Baidu reported its first quarterly loss since listing during the first three months of the year.

Details: Nasdaq-listed Ctrip will sell 31.3 million shares that are currently owned by Baidu, the company said in a filing. The shares make up around 30% of Baidu’s holdings in Ctrip.

• The shares are worth around $1 billion and each represents 0.125 ordinary share of Ctrip.
• After the sale, Baidu will remain Ctrip’s largest shareholder.
• In 2015, Baidu took 25% of Ctrip through a share swap in which the search giant gave up shares in Ctrip-rival Qunar.

Context: Baidu has had a tough year resulting from the macroeconomic effects of the US-China trade war and increased government scrutiny of online content platforms.

• The company has faced scandals related to medical ads on its platform and claims that it promotes results from its own services in its search results.
• In July, Baidu apologized after posting a fake message in which the writer claimed to be the concerned father of a missing girl who was later found dead.
• The company is increasing its focus on AI and autonomous driving. Baidu this week launched its robotaxi service in the central Chinese city of Changsha after announcing the initiative a year ago. Nonetheless, it will be a while until the company reaps financial rewards from the project, as Baidu is not currently permitted to charge for the rides it offers.

Electric vehicle maker Nio sought to assuage investor concerns after reporting disappointing second-quarter (Q2) results and canceling an earnings call with investors and analysts.

Why it matters: The company rescheduled the call a day after canceling it. Executives took a cautious tone and focused on Nio’s cost-cutting measures and plans to increase its footprint in the world’s largest EV market during the postponed call on Wednesday.

• Nio has lost a massive RMB 40 billion ($5.6 billion) since 2016, according to figures from the company.

“We are implementing comprehensive cost control measures across the organization. These measures primarily focus on increasing efficiencies and streamlining operations within our sales and service network and our research and development (R&D) functions, as well as reducing our headcount.”

—Louis Hsieh, Nio chief financial officer, during the company’s earnings call on Wednesday 

Nio shares tumble as losses widen