The China Tech Crackdown Explained [And What it Means for IoT]

The latest slew of regulation changes by the Chinese Communist Party (CCP) has had a profound effect on the status of IoT companies in China. 

The gaming industry was the first to feel the wrath of the new CCP legislation. After being torpedoed with penalties and regulatory changes to alter entire areas of business operation, gaming companies like Tencent and NetEase watched their government compare their industry to a type of digital drug addicting the Chinese youth. 

Now, there is serious cause for concern for the rest of IoT. Foreign investors have already begun to pull out after seeing a collective $50 billion decrease in the market value of China’s biggest tech corporations. Likewise, the fractious political situation between the CCP and Hong Kong – an international hub for IoT products – has added yet more uncertainty.

So, what exactly does this latest tech crackdown mean? And what will be the consequences for foreign IoT firms trying to enter or stay in the Chinese market? 

Let’s take a look.

PIPL Starts an Era of Enhanced Tech Scrutiny in China 

Beijing introduced the Personal Information Protection Law, known as PIPL, earlier this month as part of the government’s efforts to tighten regulation on the tech industry. 

The law states that IoT firms that collect data must get prior consent to obtain and process said data. In addition, these companies who do collect personal data cannot refuse access to services to consumers who choose to opt-out of having their information used. IoT companies also must adhere to strict rules around where and how data is transferred.

Worryingly, failure to comply with these new laws will result in heavy fines by the CCP’s regulatory bodies. 

Given the IoT industry’s dependency on consumers’ personal data to create better and more customizable products, these changes could cause a massive shift in the way tech must be made for China. 

There are also significant issues with how PIPL could restrict the way that devices communicate with one another, and how they transfer information to one another. The friction between establishing a common ‘language’ for devices to send and receive information, and the need for data encryption and privacy, makes building a robust network for smart homes and businesses alike challenging. 

More Red Tape and Headaches For IoT Solutions

Coming into effect on September 1st, the latest Chinese Data Security Law contains many provisions similar to PIPL around using, protecting, and collecting consumer data in China. 

One of the key takeaways of this new Data Security Law is cross-border data transfer requirements. As of next month, transferring personal consumer information outside of the Chinese border will be subject to a security assessment conducted by the CCP. This assessment checks that all data being transferred is stated within the personal information usage agreement signed by the consumer. 

Moreover, data or information that is deemed to be potentially threatening to national security, the economy, or general public interest will be held in principle by the Chinese authorities.

All of this adds up to greater bureaucracy imposed on foreign information-based tech companies that need unadulterated access to data. In order to continuously improve products and stay ahead of rivals, IoT companies need an uninterrupted flow of information. The Chinese Data Security Law puts all of that in jeopardy.

Penalty-wise, companies that fail to comply with this regulation could incur fines of up to $154,600 for a single offense. For more serious data transfer offenses, this could rise to $1.5 million. 

Alibaba’s Perceived Monopoly and the Future of Internet-Based Business in China

Back in April this year, Alibaba was hit with an eye-watering $2.8 billion fine by China’s anti-monopoly regulators. The e-commerce site was accused of prohibiting its merchants from doing trades or ad campaigns on competitors’ platforms. 

Interestingly, this incident came in the wake of Alibaba Co-Founder Jack Ma’s criticism against Chinese regulators back in October 2020. This resulted in Alibaba’s attempted IPO launch of Ant Group – its financial services company – being blocked by the President of China Xi Jinping himself. 

So, what does this mean for the IoT industry in China as a whole? 

The nature of this enforced anti-monopoly regulation should be alarming to all internet-based companies operating in China. What’s concerning here is the reaction to negative feedback from the CCP and its regulatory bodies. A lack of ability to challenge the legislation that stifles innovation without punishment paints a bleak picture for the future of China-based IoT businesses. 

In Europe, for instance, the ability to lobby democratically-formed policy is sacred. It protects the rights of both businesses and consumers. Within the current political framework of China, examples of penalization like Alibaba will slowly become the rule rather than the exception as regulation becomes increasingly stringent.

Final Thought: What Alternatives Do IoT Companies Have?

China is becoming an increasingly difficult place for IoT companies to thrive in.

The latest batch of regulations is likely to be the start of a concerted effort to become more data security and ultimately push foreign investment out by the country. The opportunities for IoT businesses once looked lucrative, yet now appear to be squeezed by the legislative arm of the CCP. 

In spite of this, there is still potential for IoT businesses to enter and thrive in other markets where regulation is less autocratic. The European market still holds many opportunities for internet-based solutions to function free of unnecessary red tape. And for IoT providers that are already based in China, they now find themselves at a crossroads: To try to work around these new rules or search for more fruitful work environments elsewhere.

Looking to switch to a European IoT solution? Get in touch with Nabto today to book a free consultation.

Read Our Other Resources

We’ve also published a range of IoT resources for our community, including:

Buying versus building an IoT platform, which discusses how to choose the best option for you.

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