The full implications of Beijing’s rapid-fire moves against Jack Ma’s (馬雲) Internet empire in will not become apparent for weeks, but one lesson is already clear: The glory days for China’s technology giants are over.
The Chinese government has imprinted its authority indelibly on the nation’s technology industry in the span of a few days. In landmark announcements, it handed a record US$2.8 billion fine to Alibaba Group Holding Ltd for abusing its market dominance, then ordered an overhaul of Ant Group Co.
Regulators on Tuesday summoned 34 of the nation’s largest companies, from Tencent Holdings Ltd to TikTok owner ByteDance Ltd, telling them “the red line of laws cannot be touched.”
Illustration: Tania Chou
The unspoken message to Ma and his cohorts was the decade of unfettered expansion that created challengers to Facebook Inc and Google was at an end. Gone are the days when giants such as Alibaba, Ant or Tencent could steamroll incumbents in adjacent businesses with their superior financial might and data hoards.
“Between the rules for Ant and the US$2.8 billion fine for Alibaba, the golden days are over for China’s big tech firms,” said Mark Tanner, founder of Shanghai-based China Skinny. “Even those who haven’t been targeted to the same extreme will be toning down their expansion strategies and adapting many elements of their business to the new bridled environment.”
Technology companies are likely to move far more cautiously on acquisitions, overcompensate on getting sign-offs from Beijing and levy lower fees on the domestic Internet traffic they dominate. Ant in particular will have to find ways to untether China’s largest payments service from its fast-growth consumer lending business, and shrink its signature Yu’ebao money market fund — once the world’s largest.
Even companies that have been less scrutinized so far — such as Tencent or Meituan and Pinduoduo Inc — are likely to see growth opportunities curtailed.
The watershed moment was years in the making. In the early part of the past decade, visionary entrepreneurs such as Jack Ma and Tencent cofounder Pony Ma (馬化騰) created multibillion-dollar empires by upending businesses from retail to communications, elevating the lives of hundreds of millions and serving as role models for an increasingly affluent younger generation, but the enormous opportunities coupled with years of hyper-growth also fostered a winner-takes-all land-grab mentality that unnerved the Chinese Communist Party.
Regulators grew concerned as the likes of Alibaba and Tencent aggressively safeguarded and extended their moats, using data to squeeze out rivals, and forcing merchants and content publishers into exclusive arrangements.
Their growing influence over every aspect of Chinese life became more apparent as they became the conduits through which many of the nation’s 1.3 billion people bought and paid for things — handing over vast amounts of data on spending behavior.
Chief among them were Alibaba and Tencent, who became the industry’s kingmakers by investing billions of dollars into hundreds of start-ups.
All that came to a head last year when Jack Ma — on the verge of ushering in Ant’s record US$35 billion initial public offering — publicly denigrated out-of-touch regulators and the “old men” of the powerful banking industry.
The unprecedented series of regulatory actions since encapsulates how Beijing is now intent on reining in its Internet and fintech giants, a broad campaign that has wiped about US$200 billion off Alibaba’s valuation since October last year.
The e-commerce giant’s speedy capitulation after a four-month investigation underscores its vulnerability to further regulatory action.
Chinese titans from Tencent to Meituan are next up in the cross-hairs because they are the dominant players in their respective fields.
Regulators could focus on delivery giant Meituan’s historical practice of forced exclusivity — particularly as it expands into burgeoning areas such as community e-commerce — while investigating Tencent’s dominant gaming service and whether its messaging platform WeChat excludes competitors, Credit Suisse analysts said on Tuesday.
“The days of reckless expansion and wild growth are gone forever, and from now on the development of these firms is likely going to be put under strict government control. That’s going to be the case in the foreseeable future,” said Shen Meng, a director at Beijing-based boutique investment bank Chanson & Co. “Companies will have to face the reality that they need to streamline their non-core businesses and reduce their influence across industries. The cases of Alibaba and Ant will prompt peers to take the initiative to restructure, using them as the reference.”
The revamp of Ant — a sprawling financial titan once worth as much as US$320 billion — is a case in point. In its ruling, the People’s Bank of China said it wanted to “prevent the disorderly expansion of capital” and ensure that all of Ant’s financial business would be regulated under a single holding company.
Ant’s prospects could wane further after China halts improper linking of Alipay payments with Ant’s other products. New curbs on Yu’ebao also hurts its wealth business. Alipay’s 711 million active users are its potential customers.
Ant’s valuation could now be near banks (average 5 times forward earnings) compared with over 30 times at its initial public offering attempt.
Jack Ma’s company will likely have to apply and register to get into any new areas of finance — a potential ordeal given the infamously creaky wheels of Beijing bureaucracy. It faces restrictions in every key business — from payments and wealth management to credit lending.
The company’s most lucrative credit-lending arm is to be capped based on registered capital. It must fold its Huabei and Jiebei loan units — which had 1.7 trillion yuan (US$261 billion) of outstanding loans between them as of June last year — into a new national company that would likely have to raise more capital to support its operations.
Ant must also reduce its Yu’ebao money-market wing, which encompasses a self-operated Tianhong Yu’ebao fund that held US$183 billion of assets as of the end of last year, making it one of the largest pools of wealth in the world.
Alibaba appears to have got off lightly in comparison.
While the US$2.8 billion fine was triple the previous record set by Qualcomm Inc’s 2015 penalty, it amounts to under 5 percent of the company’s annual revenue, but far more insidious is the threat of future action and the dampening effect it would have on Alibaba.
The fine came with a plethora of “rectifications” that Alibaba has to put in place — such as curtailing the practice of forcing merchants to choose between Alibaba or a competing platform. Executives also volunteered to open up Alibaba’s marketplaces more and lower costs for merchants, while spending “billions of yuan” to help its clients handle e-commerce.
Ant would likewise have to tame its market-share grab in payments.
Changes to that business, which is fending off Tencent’s WeChat Pay, were among the top priorities regulators outlined. Ant pledged to return the business “to its origin” by focusing on micropayments and convenience for users.
The most amorphous, yet dire threat lies in the simple principle implicit in regulators’ pronouncements over the past few days: Beijing will brook no monopolies that threaten its hold on power.
The central bank warned in draft regulations released previously that any non-bank payment company with half of the market for online transactions — or two entities with a combined two-thirds share — could be subject to antitrust probes.
If a monopoly is confirmed, the Chinese State Council has powers to levy a plethora of penalties, including breaking up the entity.
That is an entrepreneur’s ultimate nightmare.
“Everyone is on the regulators’ radar, and it really depends on each one’s reaction next,” Shen said. “It’s better to take the initiative to self-rectify, rather than having to go through restructuring ordered by the regulators, which may not have your best interests in mind.”
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