Yahoo is leaving the Chinese market and will be discontinuing its services there from Monday in an “increasingly challenging” business and legal environment.
Foreign tech companies have withdrawn or downsized operations in mainland China as a tough data protection law governing how companies collect and store data comes into effect.
Such companies have decided that the regulatory uncertainty and reputational risks outweigh the benefits of staying in the huge market.
Which overseas tech companies have recently downsized or left China?
Yahoo said in a statement on Tuesday that its services in China would cease effective Nov. 1. Users who visit the Yahoo-powered Engadget China website this week will find a pop-up notification stating that the website will not be releasing any new content.
Last month, Microsoft’s professional networking platform LinkedIn announced that it would close the Chinese version of its site this year and replace it with a job board without social networking functions.
Epic Games, which runs the popular Fortnite video game, also says it will be taking the game off the Chinese market starting November 15. The game was launched in China through a partnership with China’s largest gaming company Tencent, which has a 40th owns percent of the shares in Epic.
Why are companies leaving China now?
The Personal Data Protection Act, which came into force on November 1, limits the amount of information companies can collect and sets standards for storing it. Organizations must obtain user consent to collect, use, or disclose data and provide users with options to opt out of data disclosure.
Companies also need to obtain permission to send users’ personal data abroad.
The new law increases compliance costs and increases uncertainty for Western companies operating in China. Companies caught disobeying the rules could be fined up to CNY 50 million (about Rs.58.17 billion), or 5 percent of their annual sales.
Chinese regulators have cracked down on technology companies to curb their influence and handle complaints that some companies are misusing data and using other tactics that harm consumers’ interests.
The downsizing and leaving also come with the US-China dispute over technology and trade. Washington has placed restrictions on telecommunications giant Huawei and other Chinese tech companies, claiming they have ties to China’s military and government.
Local businesses are feeling the heat too, with e-commerce companies like Alibaba facing fines. Regulators are investigating some companies and have imposed strict rules that affect gambling companies like NetEase and Tencent.
What other hurdles do foreign technology companies face in China?
China operates what is known as a “Great Firewall” that uses laws and technology to enforce censorship.
Content and keywords that are considered politically sensitive or inappropriate must be removed from the internet. Companies need to monitor their own platforms, delete posts, and make sensitive keywords unsearchable.
Western social media networks like Facebook and Twitter have long been blocked by the Great Firewall and are generally inaccessible to people in mainland China.
“China has put in place a very draconian policy for internet operators telling them what to do and, most importantly, not to do,” said Francis Lun, CEO of GEO Securities Limited in Hong Kong.
“I think the question is why bother (as a foreign company in China) with such a limited rate of return and such high liability,” he said.
Michael Norris, research strategy manager at Shanghai-based consulting agency AgencyChina, said compliance costs will continue to rise.
“Fortnite’s exit is particularly damaging as it shows that even a close partnership and investment with Tencent isn’t enough to make the business case a success,” he said.
Foreign tech companies operating in China are also facing pressures from their home markets. Some US lawmakers criticized LinkedIn’s censorship of US journalist profiles in China. In 2007, Yahoo was charged with providing the Chinese government with information about Chinese dissidents that eventually led to their detention.
What does this mean for internet users in China?
Over the years, Chinese alternatives have emerged to fill the void left by foreign social media platforms that stopped operating under the Great Firewall.
Instead of Google, Baidu is China’s most popular search engine. Messaging apps like WeChat are used instead of WhatsApp or Messenger. Weibo, a microblogging platform, is the closest equivalent of Twitter with more than 560 million Chinese users.
Unless they use a virtual private network (VPN) to mask their internet traffic and location and bypass web restrictions, the Chinese have fewer options for social networking and content access and are likely to use strictly censored local alternatives.