The country’s government imprinted its authority indelibly
on the country’s technology industry in the span of a few days. In landmark
announcements, it slapped a record US$2.8 billion fine on Alibaba Group Holding
Ltd for abusing its market dominance, then ordered an overhaul of Ant Group Co.
On Tuesday, regulators summoned 34 of the country’s largest companies from
Tencent Holdings Ltd to TikTok owner ByteDance Ltd, warning them “the red line
of laws cannot be touched.”
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 like 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.”
Tech companies are likely to move far more cautiously on
acquisitions, over-compensate on getting signoffs from Beijing, and levy lower
fees on the domestic internet traffic they dominate. Ant in particular will
have to find ways to un-tether 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 — like
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 last decade, visionary entrepreneurs like Ma and Tencent co-founder
Pony Ma (no relation) created multi-billion dollar empires by up-ending
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
Communist Party.
Regulators grew concerned as the likes of Alibaba and
Tencent aggressively safeguarded and extended their moats, using data to
squeeze out rivals or 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 country’s
1.3 billion bought and paid for things — handing over vast amounts of data on
spending behaviour. Chief among them were Alibaba and Tencent, who became the
industry’s kingmakers by investing billions of dollars into hundreds of
startups.
All that came to a head in 2020 when Ma — on the verge of
ushering in Ant’s record US$35 billion IPO — publicly denigrated out-of-touch
regulators and the “old men” of the powerful banking industry.
Chinese titans from Tencent to Meituan are next up in the
cross-hairs because they’re the dominant players in their respective fields.
Regulators may focus on delivery giant Meituan’s historical practice of forced
exclusivity — particularly as it expands into burgeoning areas like community
e-commerce — while investigating Tencent’s dominant gaming service and whether
its messaging platform WeChat excludes competitors, Credit Suisse analysts
Kenneth Fong and Ashley Xu wrote 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 will be regulated under a
single holding company.
What Bloomberg Intelligence says
Ant Group’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 fintech-product buyers. Ant’s valuation could now be near banks we cover (average 5x forward earnings) compared with over 30x at its IPO attempt. — Francis Chan, analyst.
Ma’s company will likely have to apply and register to get
into any new areas of finance in future — 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 will be
capped based on registered capital. It must fold its Huabei and Jiebei loan
units — which had 1.7 trillion yuan (US$260 billion) of outstanding loans
between them as of June — into a new national company that will likely raise
more capital to support its operations. And Ant must 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 2020, making it one of the largest
pools of wealth in the world.
The fine came with a plethora of “rectifications” that
Alibaba will have 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, lower costs for merchants
while spending “billions of yuan” to help its clients handle e-commerce.
Ant will 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 micro-payments and convenience for users.
The most amorphous yet dire threat lies in the simple
principle implicit in regulators’ pronouncements over the past few days: that
Beijing will brook no monopolies that threaten its hold on power.
The central bank warned in draft rules 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 State Council or
cabinet has powers to levy a plethora of penalties, including breaking up the
entity.
That’s an entrepreneur’s ultimate nightmare.
“Everyone is on the regulators’ radar, and it really depends
on each one’s reaction next,” Chanson & Co’s 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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