In China, Silicon Valley Giants Confront New Walls

In China, Silicon Valley Giants Confront New Walls
By PAUL MOZUR and CAROLYN ZHANG
Jul 22 2017
https://www.nytimes.com/2017/07/22/technology/in-china-silicon-valley-giants-confront-new-walls.html

SHANGHAI — Facebook is the world’s largest social network, with more than two billion users. LinkedIn was sold to Microsoft for $26 billion last year. And Apple is Apple, the most valuable company in the world.

In most local markets, it would be a surprise if any one of these companies were floundering. But in China, the real shock is that their troubles no longer surprise anyone.

Just in the past few weeks, Facebook had one of its most popular apps blocked by the Chinese government. LinkedIn, the globe-spanning social network of résumés, job recommendations and management essays, had its local boss step down amid tepid results in the country. And Apple announced a billion-dollar investment to comply with local law as it continued to watch Chinese demand for its iPhones fade.

This summer of challenge for the three companies offers a broad illustration of just how varied the obstacles have become for foreign companies in China. They also show in stark terms why this vast market has been frustratingly difficult for outsiders.

Tempted by the world’s largest smartphone market and an increasingly wealthy population deeply intrigued by new technologies, just about every American tech company from Amazon to Zynga has taken a shot at China. But outside of Apple and a group of older companies like IBM and Intel, few have a major presence in the country today.

“In general the China market is hard, even for Chinese companies,” said Andy Tian, co-founder of Asia Innovations Group in Beijing and former general manager of Zynga China. “It’s the most competitive place around for consumer services and technology.”

Over the years, internet companies like Twitter, Google and Snapchat have been blocked by censors. EBay was outmaneuvered by the local internet giant Alibaba. Groupon failed to stay afloat in the flood of copycats it inspired. Uber cut its lossesafter establishing a foothold and sold its local business to a Chinese rival.

Even LinkedIn, which played ball with Chinese censors two years ago in order to get into the country, has had trouble getting traction with a local audience. “The big internet companies just don’t have much of a hope here,” said James McGregor, chairman of the greater China region for the consulting firm APCO Worldwide.

American start-ups are still in the game, in particular those selling services to Chinese businesses, Mr. Tian said. But the number of big American internet firms trying to get into the country has slowed, though exact figures are hard to come by.

There are issues beyond offending censors. The Chinese internet culture is different, and at times quirky. And the technical requirements of China’s internet filters can make operating difficult. Engineers often have to find alternatives to the services technology companies rely on outside China.

For those that overcome all that, the market is rough in a way United States companies don’t normally experience, and is often tilted against outsiders.

“It’s basically like someone who has been training for Olympic taekwondo going up against a street fighter,” Mr. Tian said. “The Olympic fighter is waiting for the whistle, and the street fighter already has him on the ground hitting him with elbows. There’s no rules.”

More so than the others, Facebook’s problem in China is simple: Neither its website nor its app is accessible in the country. Both were blocked in 2009, shortly after ethnic rioting in western China. In the autumn of 2014, the umbrella protests in Hong Kong prompted the block of Instagram, which Facebook owns.

Around the same time Instagram went down, Facebook’s Mark Zuckerberg stepped up a charm campaign to try to get the social network back into China. He trotted out his Mandarin in a large public forum, invited the then head of China’s internet regulator to Facebook’s offices and even dined with president Xi Jinping during a state visit.

For all his efforts, just last week the company’s last major app in the country, WhatsApp, was blocked by the Chinese government. While experts say it’s not clear whether it will ultimately be fully blocked, in recent days users have been unable to send images, videos and voice messages.

At least partially responsible for the block, according to analysts, is a new cybersecurity law that went into effect on June 1. While vague, the new rules call for security checks on foreign companies and force firms to store key data in China.

While Apple’s position in China is about as different from Facebook’s as possible — it has built a hugely valuable retail business — it too has been affected by the law. Just the week before WhatsApp was hit by disruptions, Apple said that to ensure it complied with the law it would begin storing data from its iCloud service in China. It also said it would work with a local Chinese company to set up a data center in southwest China as part of a $1 billion investment.

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