Why are foreign tech companies pulling out of China?

HONG KONG – Yahoo Inc. is leaving the Chinese market, suspending its services there from Monday in an “increasingly difficult” business and legal environment.

Foreign tech companies have withdrawn or reduced their operations in mainland China as a strict data privacy law specifying how companies collect and store data comes into effect.

These companies have decided that regulatory uncertainty and reputational risks outweigh the benefits of staying in the huge market.

WHICH FOREIGN TECHNOLOGY COMPANIES HAVE RECENTLY REDUCED OR LEAVING CHINA?

Yahoo Inc. said in a statement Tuesday that its services in China shut down on November 1. Users visiting the Engadget China site operated by Yahoo this week find a pop-up notification that the site will not post any new content.

Last month, Microsoft’s professional networking platform, LinkedIn, announced it would shut down the Chinese version of its site this year and replace it with a jobs site without social networking features.

Epic Games, which operates the popular video game Fortnite, has also announced that it will be removing the game from the Chinese market starting November 15. The game was launched in China through a partnership with the largest games company in China, Tencent, which owns a 40% stake in Epic.

WHY ARE COMPANIES LEAVING CHINA NOW?

The Personal Information Protection Act that went into effect on November 1 limits the amount of information businesses are allowed to collect and sets standards for how it should be stored. Businesses must obtain user consent to collect, use or share data and provide means for users to opt out of data sharing.

Companies must also obtain permission to send users’ personal information abroad.

The new law increases compliance costs and adds uncertainty for Western companies operating in China. Companies caught breaking the rules could be fined up to 50 million yuan ($ 7.8 million) or 5% of their annual revenue.

Chinese regulators have cracked down on tech companies, seeking to limit their influence and respond to complaints that some companies abuse data and engage in other tactics that harm consumer interests.

The downsizing and departures also come as the United States and China compete for technology and commerce. Washington has placed restrictions on telecommunications equipment giant Huawei and other Chinese tech companies, alleging they have ties to the Chinese military and government.

Local businesses are also feeling the heat, e-commerce companies like Alibaba face fines. Regulators are investigating some companies and have imposed tough rules that affect gaming companies like NetEase and Tencent.

WHAT ARE THE OTHER BARRIERS TO FOREIGN TECHNOLOGY COMPANIES IN CHINA?

China operates what is called a “great firewall” which uses laws and technologies to enforce censorship.

Content and keywords deemed politically sensitive or inappropriate should be removed from the Internet. Businesses need to control their own platforms, removing posts and making sensitive keywords impossible to find.

Western social media networks such as Facebook and Twitter have long been blocked by the Great Firewall and are generally not accessible to people in mainland China.

“China has implemented a very draconian policy governing Internet operators, telling them what to do and above all what not to do,” said Francis Lun, CEO of GEO Securities Limited in Hong Kong.

“I think the question comes down to why bother (operate as a foreign company in China) with such limited return and such heavy liability,” he said.

Michael Norris, head of research strategy at Shanghai-based consultancy AgencyChina, said compliance costs would rise further.

“The release of Fortnite is particularly damaging, as it even shows that a close partnership and investment with Tencent is enough to make the business case work,” he said.

Foreign technology companies operating in China are also facing pressure from their domestic markets. Some US lawmakers have criticized LinkedIn’s censorship of the profiles of American journalists in China. In 2007, Yahoo Inc. was slammed for passing information on Chinese dissidents to the Chinese government, which ultimately led to their imprisonment.

WHAT DOES THIS MEAN FOR INTERNET USERS IN CHINA?

Chinese alternatives have emerged over the years to fill the void left by foreign social media platforms that have given up on operating under the Great Firewall.

Instead of Google, the most popular search engine in China is Baidu. Messaging apps like WeChat are used instead of WhatsApp or Messenger. Weibo, a microblogging platform, is the closest equivalent to Twitter, with more than 560 million Chinese users.

Unless they use a virtual private network (VPN) to hide their internet traffic and location and bypass web restrictions, the Chinese have fewer options for social media and access to content and are likely to turn to strictly censored local alternatives.

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AP video journalist Alice Fung contributed to this report.


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