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China drops the hammer on the country’s booming tech industry

July 27, 2021, 6:11 PM UTC

Authorities announced a series of regulations targeting China’s largest tech companies over the past three days, in a show of force that will affect working conditions for delivery workers, foreign funding from education companies, and monopolistic behavior.

These new rules targeted some of China’s hottest software sectors — especially those with large American investment. The educational regulations, for instance, essentially bans tutoring companies from making profits, raising money, and listing on stock exchanges. The Chinese government said the move was due to the education sector being “hijacked by capital.” These kinds of startups had attracted American investors like Sequoia and BlackRock, and previously earned a valuation from JPMorgan of more than $100 billion. That estimate was revised to $24 billion on Monday, according to The New York Times.

“The worst-case became a reality,” JPMorgan analysts wrote. “It’s unclear what level of restructuring the companies should undergo with a new regime and, in our view, this makes these stocks virtually uninvestable.”

The news has also wiped billions from publicly-traded companies like Chinese e-commerce giant Meituan, which offers ride sharing, food delivery, and travel booking. The company’s stock dropped 14% on Monday, following the news of regulations.

Regulations for delivery companies cover a broad range of labor issues, including a mandate that workers are paid at least the minimum wage according to where they’re working. The new rules also require less stringent algorithmic management to allow more time for deliveries, as well as access to social security and insurance.

Notably, these labor reforms are specifically targeted towards gig workers employed by software companies, rather than employees of hardware and semiconductor firms known for egregious labor conditions.

This slate of new rules is meant to bring tech firms that have reshaped China’s cities to heel with national priorities, speculators say. Columnist Noah Smith wrote this movement could reflect China’s desire for its tech industry to be more invested in hardware and semiconductors, which hold more international influence than software. 

The central government also crushed Jack Ma’s Alibaba empire after he criticized the regulators, and ripped ride-hailing giant DiDi from app stores after a U.S. IPO.

A New York Times article suggests the regulations are about power: The central government is reminding increasingly-influential tech firms who sets the agenda. This is being done by ensuring tech companies don’t bury small businesses run by low-income citizens, while also refocusing the tech sector on international competition with the United States.

No matter the intent, the outcome is the same. These regulations make China’s tech sector less appealing to outside investors, while strengthening domestic rules around how some workers are treated. And China’s tech firms know exactly who is boss.

Dave Gershgorn 
@DaveGershgorn

NEWSWORTHY

Tech earnings abound. Prepare for Apple, Facebook, and Google to report quarterly earnings today. All three companies are expected to fare well, benefitting from remote work and a potential return to pre-pandemic advertising revenue

Intel’s big play. Buffeted by the success of Samsung, TSMC, and Apple’s new M1 chip, Intel is announcing a new business strategy to compete in the next era of semiconductors. It will start to make chips for Qualcomm, one of the world’s biggest chip designers — the first time it's opened its foundry to a rival. The company is also rebranding its chip lines, but chip names are generally confusing and inconsequential anyway. Read more from Fortune’s Jonathan Vanian on the news.

Enter the metaverse. It seems Facebook CEO Mark Zuckerberg’s musings on building a tech “metaverse” weren’t just talk. After mentioning the idea, which refers to a merging of virtual and physical space through technologies like augmented reality, Facebook is launching a Metaverse team. It will hire hundreds of employees for the new division, who will report to Facebook's VP of AR and VR, Andrew Bosworth.

Buzzy new headphones. Tech watchers are abuzz over new wireless earbuds announced by hardware startup Nothing, which launched its first product today, called Ear 1. The earbuds have similar specs to the AirPods Pro, but cost $99. Nothing is founded by Carl Pei, who previously helped launch smartphone maker OnePlus.

A call for action. More than 2,000 former and current employees of Activision Blizzard signed a letter demanding accountability, after a lawsuit from state regulators accused the company of heinous acts of discrimination and harassment against women. The company has denied the details of the lawsuit, which include harassment so severe that a female employee killed herself on a work trip.

FOOD FOR THOUGHT

Rising tides sink all tech companies. Facebook and Google have built their headquarters on land that will be subsumed by rising sea levels in coming decades. A new story from NPR dives into who should pay for the municipal projects to prevent tech companies from having to swim to work.

Questions of equity had already come up in the local community. Facebook and East Palo Alto would be contributing similar amounts of money for sea level protection, with Facebook’s share only covering part of its campus. Taxpayers would foot most of the bill for the entire levee system.

In meetings, East Palo Alto residents asked: Shouldn’t Facebook be doing more? The company’s arrival had driven up housing costs and increased traffic around them. Now, facing a new threat, why wasn’t Facebook using its enormous wealth to pay more to help its neighbors? residents wondered.

IN CASE YOU MISSED IT

5 key takeaways from Tesla’s historic Q2 results that have nothing to do with Bitcoin by Christiaan Hetzner

Pivot or else: How China’s largest edtech company can survive the government’s latest crackdown by Yvonne Lau

Private companies are planning more than just joyrides to space by Fortune Editors

Office workers to bosses: I’ll quit if I have to go full-time back to the office by Sophie Mellor

Tesla shakes off Bitcoin’s recent woes, but how will other crypto-heavy companies fare? by Declan Harty

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BEFORE YOU GO

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Check out how Shamook outdid Lucasfilm in one of their most popular YouTube videos.

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