China Tech Giants’ Pivot: Retreats from Metaverse, Autonomous Driving, Chip Development, and Beyond

Reflecting on 2023, a key theme for the Chinese technology industry has been strategic retreats from various once-popular sectors, with a sharp focus on financial performance.

Amid challenging macroeconomic conditions and heightened competition in an already saturated market, tech giants like Tencent, ByteDance, Alibaba, and Baidu have shifted from an "expansion-first" approach to prioritizing "survival."

This shift has led to a scaling back of operations and the elimination of non-essential businesses to enhance financial results. This trend is an extension of the more aggressive downsizing and project closures seen in 2022.

The results of this strategy are evident. ByteDance’s 2023 sales soared to US$110 billion. Alibaba reported a Non-GAAP net profit of 40.188 billion yuan, a 19% increase year-on-year. Tencent’s net profit in the third quarter hit 44.92 billion yuan, up 39% year-on-year, with a gross margin rise to 49.5%. Kuaishou turned profitable, while Meituan’s net profit skyrocketed by 195.3% year-on-year.

As the year draws to a close, there are indications that the major tech companies might be witnessing a thaw in the market environment, with many ramping up their hiring. This development could offer cautious optimism to investors as we head into 2024.

Let’s review some highlights of this strategic retreat by Chinese tech giants in 2023.

1. The Metaverse

The metaverse experienced a notable downturn this year. In a significant move, Tencent dissolved its XR team in February, with the team’s head departing before the announcement. ByteDance’s VR division, PICO, underwent severe layoffs, scaling down to essential personnel for basic maintenance of the business.

Kuaishou made a quiet exit from projects like panoramic video and metaverse spaces early in the year. At Baidu, the metaverse initiative "Xi Rang" lost its business head, Ma Jie, in May. This was a stark contrast to the over a hundred high-profile metaverse events it hosted in 2022, as "Xi Rang" remained largely silent throughout this year. iQIYI’s VR company wasn’t spared either, facing both layoffs and operational suspension, and it even found itself listed as a debtor due to outstanding debts.

2. Autonomous Driving

Autonomous driving is a sector brimming with long-term promise, but companies are grappling with a significant challenge: the need for sustained investment without the assurance of near-term financial returns. This dilemma is particularly acute in a field where the payoff is projected over a 10 to 20-year horizon.

Major Chinese cities, including Beijing and Shanghai, have initiated commercial trial runs of fully unmanned autonomous taxis and trucks. These trials are gradually garnering user acceptance, signaling a shift in public perception towards autonomous vehicles.

However, the path to widespread adoption is fraught with hurdles, including the refinement of underlying technology, ensuring safety, managing commercial costs, navigating policy and regulatory frameworks, and addressing ethical considerations, particularly the potential for job losses as autonomous vehicles replace human drivers.

In a strategic pivot, Alibaba’s DAMO Academy restructured its autonomous driving team in May. Nearly a hundred of its members were reassigned to Cainiao, Alibaba’s logistics arm, to work on commercially viable autonomous logistics solutions. The rest faced potential layoffs or transfers to other divisions within Alibaba, underscoring the company’s recalibrated focus on areas without immediate commercial potential.

Baidu, a forerunner in the autonomous driving sector, has also tempered its ambitions. Earlier this year, the company undertook a personnel optimization within its Intelligent Driving Group, signaling a more measured approach to its investments in this area.

Another notable development in August was Didi’s decision to sell its intelligent car development business to Xpeng Motors for around HK$5.835 billion. This move marked a strategic shift for Didi, indicating its departure from developing an autonomous driving fleet. Instead, Didi appears to be realigning its focus towards forging partnerships with automotive companies, leveraging its technological capabilities in the intelligent car sector.

3. Self-Developed Chips

In May, Oppo’s chip development unit ZEKU was reportedly dissolved with hundreds of employees laid off. Before its dissolution, ZEKU was highly regarded in the industry and considered one of the most promising newcomers in the Chinese chip sector.

The chip development teams of Xingji Meizu Group and TCL’s Moxing Semiconductor also reported shutdowns, adding to the sense of loss. But major companies like Alibaba, Huawei, and Xiaomi are persevering in the road of self-development chips.

4. Products with Limited Growth Potential

Tech companies are increasingly streamlining their portfolios, focusing on projects with a clearer path to profitability and cutting back on those with limited growth potential and high investment requirements.

In a notable move, ByteDance’s gaming division announced significant downsizing and layoffs in November. The company also reportedly put Mutong Technology, a high-priced acquisition, up for sale, signaling a strategic withdrawal from the gaming sector.

Rumors suggest that Bilibili’s gaming business is also facing cuts, with some in-house projects being terminated and certain offices closing down.

Tencent Education underwent major changes in October, with its president stepping down. Earlier, Tencent Classroom Education ceased external services, marking the gradual closure of its entire consumer-facing education business line.

This move was somewhat anticipated, given the regulatory crackdown on China’s online education sector. ByteDance’s Dali Education and other similar ventures have also seen a reduction in focus.

Tencent has been particularly aggressive in discontinuing various business lines. In September, its online audio app Penguin FM was shut down after eight years of operation. December saw the complete cessation of Tencent’s task and schedule management app, Tencent Dai Ban, and its NOW live streaming service.

Meanwhile, Alibaba appears to be scaling back Taote, a business unit specifically designed for lower-tier markets to rival Pinduoduo, indicating a shift in strategy amidst the changing market dynamics.

Closing Thoughts

These strategic retreats by Chinese tech companies are largely a response to the broader market environment. A CNNIC report reveals that as of the first half of this year, China’s internet user base reached 1.079 billion, a modest increase of 11.09 million from the end of the previous year, achieving an internet penetration rate of 76.4%.

A closer look at the growth trends in recent years shows a sustained decline in the addition of new internet users. Over the past six months, the penetration rate has grown by a mere 0.8%, suggesting that the market is approaching a point of near-stagnation.

This slowdown in domestic market growth is partly why China’s tech sector has found remarkable success internationally. Companies like Temu, Shein, and TikTok have made significant inroads in global markets.

In contrast to the saturated and highly competitive domestic scene, the international market still presents a landscape of relatively untapped potential for these tech giants. Beyond e-commerce, these firms are exploring opportunities in gaming, general entertainment, and new consumer products in overseas markets.

This shift towards international expansion is poised to gain further momentum in 2024.

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