Why Chinese Tech Startups Want to Move Away From China

The Chinese tech industry is valued at $561 billion and is growing at a phenomenal rate. But uncertainties of geopolitics and China’s stand on many issues concerning the world are playing a part in Chinese companies increasingly cutting off ties with their homeland.

The move has positively affected the tech industry by allowing these companies to set up bases in host countries and generate local employment.

These tech firms are wary of the relationship between the US, still one of the biggest tech consumers, and China has been on the decline. What started during the presidency of Donald Trump has continued in the era of Joe Biden, who recently imposed a sweeping ban on microchips manufactured in China in recent months.

The situation is no different in other countries, which have imposed restrictions on various apps originating from China, including TikTok.

Demand for Localization by foreign countries forcing Chinese tech companies to move out

The move to offshore locations is necessary, especially for enterprise solution providers, as they must physically interact with their clients most often. In addition, this builds confidence among their clients, who are less likely to believe in companies operating remotely from China. Also, once these companies have enough American employees, they can have the support of local government and political representatives, who will speak in their favor in times of crisis.

But relocation can be expensive. Chinese tech products are cost-effective only because the labor and operational expenses are cheap compared to Western countries. For example, in 2022, an engineer in China earned just one-fifth of his US counterpart’s salary, which are the advantages companies will lose once they move out.

Not just cheap labor, companies also find some of the best talents in the world in China. While the US is excellent in fundamental research around AI, ML, quantum computing, and other cutting-edge technologies, Chinese engineers are good at implementation. Though some of the products were initially developed by the US, they have been taken to the world by Chinese companies. Like in the case of short videos introduced by the American company Vine, TikTok turned it into a rage across the globe.

The Chinese administration has a role to play in this Exodus

Besides pressure from foreign governments to localize servers and employ more local talent, the Chinese government too has yet to make it easy for homegrown tech companies.

The Chinese securities authority has made it mandatory for companies with Chinese nationals in their management who live in the country and those with major operations within its borders to go through tax and other filing processes. Also, over the last few years, it has cracked down on some behemoths like Alibaba, Tencent, and others, dashing venture capitalists’ confidence. As a result, there is a sense within the tech community that the last two decades of uncontrolled and phenomenal growth might be over.

Tech companies must also walk the fine line and not antagonize the communist government. The recent ban on cryptocurrencies has dampened the budding market too. Many have moved to safer havens like Singapore as they don’t want to be caught by regulators.

Some point out that Chinese companies should proudly profess their national identity and consider it an advantage. But it is only accessible once the geopolitical situation changes and the Chinese government loosens its regulatory mechanism.