Scott Salandy-Defour used to make frequent stops at a battery manufacturer in southern China for his energy startup based in Hong Kong. The appeal of Hong Kong, he said, is its adjacency to the plentiful electronics suppliers in the Pearl River Delta, as well as the city’s amenities for foreign entrepreneurs, be it its well-established financial and legal system or a culture blending the East and West.
“It’s got the best of both worlds,” Salandy-Defour told TechCrunch. “But it’s not going to be the same.”
On July 1, Hong Kong’s sweeping new national security law came into effect, spelling the most profound change to the city’s way of life since the former British colony returned to Chinese rule in 1997.
The legislation will see Beijing set up an official security apparatus in the city to suppress what the authority defines as subversion, terrorism, separatism and collusion with foreign forces. Non-permanent residents can be expelled and companies can face fines if suspected of contravening the law.
Though the law doesn’t target the technology sector per se, speculation is rife about how it may affect entrepreneurs and larger companies as they go about their day-to-day operations and long-term plans. We talked to a handful of individuals in an attempt to parse out the ramifications of the law on internet freedom, data control, entrepreneurship, venture capital and other aspects pertaining to the tech industry. Several of our sources requested to have their names withheld in order to speak freely, an example of the law’s effect in action.
Part of the concern arises from the vagueness of the legislation. “We do not know anything concrete,” a China-based lawyer specializing in cross-border corporate cases told TechCrunch. “The national security law passed in Macau 11 years ago, but I heard there have been no enforcement cases. Hong Kong might be different. Police already prepared and carried banners warning against speech or gathering in violation of the new law.”
The bottom line is that the law impacts everyone in Hong Kong. “[It] will have a chilling effect as people try to understand its implementation,” reckoned Jeremy Daum, a senior research fellow at the Yale Law School Paul Tsai China Center.
Internet freedom
An outstanding concern is that the new rules could curtail internet freedom in the freewheeling city. Specifically, Article 9 stipulates that the Hong Kong government “shall employ necessary measures to strengthen publicity, guidance, oversight and management in schools, social organizations, media, networks and other matters related to national security,” with “networks” here referring to the internet.
There are already signs of self-censorship. Some residents have started to delete their Twitter accounts and messages “out of fear of the national security law,” a Hong Kong-based media professor pointed out to TechCrunch.
While the law doesn’t give rise to “a Great Firewall situation overnight, it will be insidious nonetheless,” said a Hong Kong-based digital rights expert. “Platforms, publishers and content hosts are likely to self-censor broadly given the vagueness of the law, and even then we’ll likely see more takedown requests and the like from the government.”
Shortly after the law took effect, an app called Eat With You, which labels local eateries supportive of the Hong Kong protesters, terminated its service. A source close to the app told us that the takedown was voluntary. Though the developer didn’t say whether it made the decision to preempt internet crackdown, it has “put other plans on hold.”
AppleCensorship.com told TechCrunch it’s monitoring potential removal of apps by Apple in Hong Kong, where the giant commands a 44% market share in the mobile handset market. The site is a project created by researchers at GreatFire.org, an organization that monitors internet censorship in China, to track which apps are unavailable in various App Stores.
“Apple has shown over and over again that they are willing to censor apps on their platform at the behest of government authorities,” said GreatFire.org’s Charlie Smith of Apple’s recent removal of TikTok in India.
A week after the law’s enactment, tech giants have come to reckon with the city’s new circumstances. Facebook and Twitter said they have suspended data requests from the Hong Kong authority. TikTok, on the other hand, announced it would exit Hong Kong. Reddit, which received an outsize investment from Tencent, provided a more evasive response: “All legal requests from Hong Kong are bound by careful review for validity and with a special attention to human rights implications.”
Residents in the city of seven million people have been bracing for censorship in recent weeks. Demand for virtual private networks (VPNs), which let users access otherwise banned apps, surged in Hong Kong after Beijing passed the national security law in late May.
“But a VPN is not a magic bullet,” the media professor argued. The tool has proven to be a short-lived solution. Back in 2017, Apple removed hundreds of VPNs from its Chinese App Store, stating it did so to comply with Chinese regulations.
Others who are more attuned to the Chinese internet are less wary. Hugo Cheuk, co-founder and chief operating officer of viAct.ai, a Hong Kong-based startup using computer vision to manage construction safety, said he already uses a wide range of apps, both Chinese and overseas ones, and can easily switch to alternatives.
“Let’s say if for whatever reasons WhatsApp cannot be used in Hong Kong one day, you still have other options like Messenger, Line, Dingtalk, WeChat,” he said. “Even apps like Slack or Snapchat weren’t popular just a few years ago, but we still communicate well back then.”
Data control
Some worry that the enforcement of the security law could lead to requests of user data by Beijing, making Hong Kong a less attractive place for tech companies resistant to China’s data review policies. As Daum noted, several provisions directly allow for the search of electronic devices and request service providers to delete information.
According to Article 43:
“When handling cases of crimes endangering national security, the Hong Kong Special Administrative Region government police department for the preservation of national security may employ the various measures that the extant laws of the Hong Kong Special Administrative Region allow the police and other law enforcement departments to take when investigating serious crimes, and may employ the following measures:
(1) search premises, vehicles, boats, aircraft and other relevant places and electronic devices that may contain evidence of an offence.
…
(4) Requiring persons who published information or the related service providers to remove information or provide assistance.
“When setting up their APAC headquarters, foreign headquarters may no longer choose Hong Kong because the law overrides the original legal system,” a partner of a Hong Kong venture capital firm told TechCrunch.
While Hong Kong is primarily known as a free trade and financial center, many international tech firms have set up offices there as a conduit into the APAC market.
Facebook and Twitter, whose main services are unavailable to mainland users, employ marketing staff in Hong Kong to court Chinese exporters with overseas advertising needs. Unicorns like delivery service Lalamove, logistics firm Gogovan and travel platform Klook, put their headquarters in Hong Kong for its strategic geographical location to attract customers across Asia.
“As a historic trading center, with ease of currency exchange, data and logistic flows, Hong Kong has played a key role in cross-border e-commerce. Many startup tech companies service clients across Southeast Asia from a base in Hong Kong,” said Napoleon Biggs, a digital marketing consultant with over two decades of experience in the region.
Though the new regulation may hit these sectors in terms of requests for government access to data, it will not affect their businesses otherwise, he reasoned.
Being in a key geographic location, as an internet hub for submarine cables and satellite dishes, Hong Kong also acts as a top data center destination for multinationals, Biggs observed. The question now, he said, is how multinationals will perceive this new law and how it will affect their daily operations, if at all.
Startup hopes
Many entrepreneurs see Hong Kong as a springboard to its nearby resources rather than their main market. “Hong Kong investors are super risk-averse. The risk of being an entrepreneur doesn’t have the same level of respect here as in the U.S.,” reckoned Salandy-Defour, whose company Liquidstar deploys smart batteries primarily in Africa.
“But there are opportunities to network quickly,” he added. “We are also so close to Shenzhen and can speak to people [in tech] there who know what they are doing.”
Some Hong Kong entrepreneurs are hopeful that the law could accelerate the Greater Bay Area (GBA) initiative, which aims to stitch together Hong Kong, Macau and other cities around the Pearl River Delta, including economic powerhouses like Shenzhen and Guangzhou.
With its own set of laws and economic system in line with Western practices, Hong Kong has long been a top destination for multinational financial services. The special status was, however, not beneficial for technology companies targeting the Chinese market.
“If we want to do business in China, the first concern is the adaptation of different laws of China. Now, with the newly established national security law plus the GBA initiatives, more resources will be allocated to the 9+2 cities in the market and business perspectives, so we can more easily access the China market,” suggested Cheuk.
The integration can extend the potential reach of Hong Kong companies from seven million customers to 70 million in the GBA region, the entrepreneur said. “It’s good for startups trying to attract investment.”
His optimism is echoed by a Hong Kong-based investor for a Chinese venture capital firm. “After the law came into effect, there may be fewer technological exchanges between Hong Kong and the U.S. or Europe, but the GBA is more important to Hong Kong’s future development.”
For Hong Kong-based entrepreneurs who uphold freedom of information, the law may not bode well. Salandy-Defour, an American citizen, said he’s mulling a move to Singapore or Australia. In the long term, he plans to diversify his supply chain in other countries like Japan or Germany for sustainable batteries.
Relocation is less realistic for entrepreneurs who generate most of their revenues from the mainland. Several of them voiced concerns about the law’s adverse effect on freedom of speech, but have declined our interview requests due to concerns that their comment may violate the new law.
Decoupling spillover
The divide between Washington and Beijing is spilling into Hong Kong as the security law is seen as undermining the territory’s autonomy. In response, the U.S. declared Hong Kong is no longer autonomous from China and suspended the export of sensitive technologies to the city.
The impact of the split was evident. Shortly after China passed the national security for Hong Kong in late May, Hong Kong-based staff of China Mobile lost access to a piece of IBM data software, an employee at the Chinese telecom giant told TechCrunch. The staff has since switched to a Huawei substitute called TaiShan, which the source said comes with a user interface “very similar” to the IBM product.
China Mobile and IBM have not responded to our request for comment.
When it comes to picking promising local startups, the Hong Kong venture partner said he will avoid industries deemed “sensitive” or susceptible to sanctions by the U.S. He’s also advised portfolio companies with an international plan to diversify their supply chain from China to nearby regions like Southeast Asia. Limited partners from the U.S. may start to shy away from Hong Kong VC funds, he speculated, as the city gets caught in the crossfire of trade tensions.
It’s notable that one of the most prominent VCs in Hong Kong, Horizons Ventures, which backs a lot of startups globally and is led by one of Asia’s richest men, Li Ka-shing, has long kept a low profile. It continues to do so now, perhaps very wisely. Some of the big names in its expansive portfolio include Spotify, Slack, Zoom, Impossible Foods and Skype. The firm did not respond to requests for comment for this article.
An unintended implication of Hong Kong’s loss of its special status is the potential inconvenience to mainland companies. It’s a common practice for Chinese companies to maintain a Hong Kong entity as a gateway to purchase U.S. technologies, tapping the region’s favorable trading terms, the venture partner said. Many Chinese exporters also take advantage of Hong Kong’s well-developed financial system and currency stability to handle international fund transfers.
“If that expediency is gone, Hong Kong is just another Chinese city,” said the investor.
US plans to rollback special status may erode Hong Kong’s startup ecosystem
Comment