Caixin
Oct 16, 2019 10:00 AM
TECH TALK

Government Policies Fuel Rapid Rises, Declines in Emerging Tech Sectors

It’s been a week of breakneck developments in the China tech world, as the NBA got shut out of one channel after another on China’s airwaves and internet after one team’s general manager made some remarks that were politically incorrect in Beijing. I won’t wade too far into that case, but instead want to focus on another new case involving a high-tech firm that’s suddenly hit the jackpot due to a Beijing policy swing.

Both cases nicely illustrate an important point for companies in China in general, and especially high-tech firms that are often at the cutting edge of emerging industries. That point is that China is quite a unique place when compared with most Western countries due to the huge influence government policies can have on local emerging industries.

Put more directly, when China makes up its mind to do something, the money taps start to flow almost immediately. But the reverse also holds true, and those taps can shut off just as quickly when Beijing’s priorities shift. The NBA case is a variant on that formula, since Beijing is equally capable of quickly mobilizing public sentiment against someone — be they domestic or foreign — who does something that’s out of line with the national agenda.

The China high-tech landscape is littered with domestic companies that have committed such grievances, usually by falling afoul of regulators who suddenly decide that activities like live streaming personal opinions are somehow “unhealthy” and thus undesirable. The bottom line for those looking to carve out a space in China’s high-tech realm, as well as their backers, is to try to understand the government’s attitude towards whatever industry they’re trying to enter as well as how that could change.

In that context hot areas like autonomous driving could look like good bets regardless of other circumstances, because Beijing is showing growing signs of strongly supporting such a cutting-edge area these past couple of years. That almost inevitably means it will provide all kinds of subsidies, from cash grants to preferential tax policies, for anyone shrewd enough to get into the space.

All that said, let’s look past the NBA case, which already seems to be fading into memory as quickly as it burst into headlines, and instead look at the much smaller case involving a tech firm called Genvict Technologies. Located in the high-tech hub of Shenzhen, this company labored in relative obscurity until recently making components that enable automated payments when drivers pass through highway tollbooths.

The company was humming along quietly in its niche until May this year, when Beijing suddenly decided it was going to rid the country of the thousands of tollbooths cluttering its highways by the end of 2020. That meant Genvict’s products were suddenly in huge demand, prompting the company to announce its profit would rise by more than a factor of 200 in this year’s third quarter.

Government orders

It turns out the big driver behind Genvict’s huge profit jump was two massive orders during the quarter, both from provincial toll road operators in China’s prosperous eastern coastal area. Broader government data showed the number of automated toll users nationwide grew from just 77 million at the end of last year to 130 million at the middle of last month as the new campaign gained steam. The Ministry of Transport, which is driving the program, wasn’t content to stop at that and has set a goal of 180 million users by year end.

As a longtime observer of the China tech world, I can say this particular story and also the NBA case are just more of the same. Before the tollbooth technology case, the last major beneficiary of such policy-led largess was the electric car industry.

In that case companies piled into the industry left and right, often with little or no experience and using outdated technology, simply to get the government money being handed out. And in typical fashion, the boom that lasted three or four years, probably minting quite a few new millionaires in the process, has now shifted into reverse.

Again this is no surprise and has happened many times before. After several years of heaping huge largess on such sectors targeted for development, Beijing suddenly wakes up to the fact that its generosity was being abused and pulls the plug. That’s certainly what’s happening now with electric vehicles, where subsidies are being curbed and eliminated almost as quickly as they were rolled out.

So, how do you use this kind of policy swing to your advantage and avoid having the rug pulled out from under you if you’re a tech investor or entrepreneur? For investors the answer is pretty easy: You invest in just about any spaces where the government has shown its intent to offer generous incentives. Then you withdraw your money after a couple of years and reap handsome profits before the inevitable bust arrives.

For a company like Genvict, I would propose investing for the next couple of years, during which time the stock is likely to soar on the back of the tollbooth-elimination campaign. But I’d also make a very clear escape map and stick to it, in this case by aiming to sell the shares within a couple of years.

For serious tech entrepreneurs the question is a bit more nuanced. At the end of the day, there’s really no substitute for true innovation and possession of cutting-edge technology in creating a successful tech firm, regardless of government support.

That kind of company can really succeed almost anywhere if there’s true demand for its products. But in China the short-term rewards especially could be far bigger than they would be in other markets thanks to the government support. That could also position a company to better succeed over the longer term with relatively lower debt levels by taking advantage of such largess.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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