The new regulations on personal data in China have sent shockwaves through the business community, pushing companies to make adjustments to the already existing business models we have today. This comes with implications within China’s domestic sphere, but also for those doing business with China from the outside. It is best to stay informed and better yet to understand from a cultural perspective, why these changes are occurring.
Signals in the Business Community
Signals of this phenomena have come from multiple sources, The Economist, Baidu, and by China’s AI guru Kai-Fu Lee. As early as January 27th, 2018, The Economist observed these changes when it published an article stating that “consumers [in China] are becoming more anxious about data privacy.”
Later in 2018, Baidu CEO Robin Li mentioned that Chinese citizens tend to exchange privacy for convenience. For this statement, he received severe criticism and attacks from the public.
In 2020, in a public speech, China AI guru Kai-Fu Li brought up the data sharing practice within the tech industry, which resulted in him being issues a serious clarification notice from ANT Group.
All of these various events have led us to the situation we are faced with today. A consolidated regulatory framework on data protection is underway. Because of these shifts, we see Ali, Didi, Baidu, and Tencent facing significant challenges from the regulatory changes on data privacy now in 2021.
These regulatory changes are creating large shifts and greater impacts on China’s innovation ecosystem. We see this in more than just a couple areas, for example:
Recently, Alibaba’s platform was required to upgrade by August 15th, 2021, forcing numerous vendors to adjust their digital transaction systems (ERP, CRM, and VMS) for privacy preservation. Now we can say that “precision advertising” is gone. How will vendors cope with these changes? We will see as these changes occur and are put in place over the following months.
AI and Big Data
With less personal data available for access, e-commerce leaders will experience more hurdles and resource drain. Ali, Tencent, and Baidu have been global innovation leaders in AI and big data. Their success attracts international capital which is injected into and refuels the innovative activities in these industries. Will this self-enforcing cycle slow down? Among other complicated geopolitical issues, we will naturally see a slower iteration of algorithms due to less data available.
On the other hand, we see new business models emerging, offering transparent, volunteered personal data utilization (based on encryption and blockchain technologies), but coming with a price. Moreover, these models tend to align more with government agencies, so these will continue to grow and flourish.
Implications to Foreign Investors and Trading Partners
The changes in data regulations in China not only affect China’s domestic sphere, but also influences people who work with businesses in China, particularly as an investor or trading partner.
The market intelligence company IDC has forecasted that the market for data solutions will reach a value of 300 billion USD (globally) and 80 billion RMB (in China) in 2023.
However, foreign investors do not have the advantage of offering general data solutions through technology transfer or other means of collaboration. This is because Chinese entities have already developed their competitive edge in data science and domestic technology is sometimes even more advanced than what foreign investors have to offer. Another contributing factor is that data solutions may involve or influence national security. For these reasons, Chinese enterprises typically adopt technology that has originated locally.
On the other hand, the greatest opportunities for foreign investors most likely lie in transplanting proven business models which integrates specific industry knowledge. Western countries, especially countries in the EU, have adopted higher standards in personal data protection for a long time. In each of their business lines, they have gained experience and operational know-how to cope with relevant regulations. Such hands-on experience can help Chinese players in the corresponding business lines to adjust their business models.
Impacts on International E-Commerce
As personal data regulations continue to change China’s international trade partners must also stay compliant. This means that trading partners should first watch for ripple effects from e-commerce platforms and their supply chains’ recent logistic changes in China to know what changes to make within their trading businesses.
Culture and Interpretation of the Law
Moving forward, international business partners, traders, and investors can continue to better understand Chinese business and legal regulations by better understanding China’s cultural characteristics.
The legal community has discussed personal data protection for a long time and relevant regulations have been enacted. We should also be reminded that the PRC Constitution says, “经济制度的基础是生产资料的社会主义公有制” (e.g., “the means of production is owned by the people”).
In the era of data, more and more economists have considered data to be a new productive factor to supplement entrepreneurship, labor, land, and capital. In the case of personal data protection, it is possible that data is considered a means of production and thus also considered to be owned by the people. With this cultural context, it is easier to understand China’s stance on the importance of personal data protection.
Morgan Stanley, in its recent report, describes this current evolution as China’s “regulatory reset.” What implications do these changes have on regulations and business in China’s personal data protection campaign?
Dr. Jili Chung – the author of Innovation’s Crouching Tiger and the founder of Spring IP – is passionate about bridging the gap between the East and the West by educating about China. Spring IP is a start-up dedicated to fostering innovation of small-to-medium enterprises in Greater China through AI and big data technologies.
To learn more about Innovation’s Crouching Tiger and the ICTiger team’s aspirations, find us on LinkedIn @ictiger2020 and join our newsletter to learn more.