An extraordinary convergence of everything that is good and bad is underway in China’s technology sectors.
On the one hand, monopolies are being curtailed to establish a competitive market structure that may be able to deliver the innovation and growth outcomes that China needs in its development phase.
On the other hand, the historical power of internet data is being corralled by the CCP as another tool for dictatorship and repression.
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Good luck predicting how that all turns out! TS Lombard with the note:
Financial and anti-monopoly investigations into Alibaba are almost over, setting a baseline from which to judge the wider sectoral and economic impact. The added political dimension to the $BABA case means future regulatory and pecuniary punishment for the sector is unlikely to surpass that handed down to Alibaba. Regulators will now broaden investigations to encompass other large tech firms; more fines are coming, but fundamental changes to business operations are unlikely (fintech being the notable exception). However, caution is still needed: the regulatory shift is structural and long-lasting; data regulation is next in the firing line. More broadly, the result is a winfor SMEs, small cap technology and traditional finance.
Initial anti-monopoly and financial investigations into Alibaba and Ant Group have been completed. As we expected,Beijing showed some restraint: it has not forced a breakup of either entity and is allowing core business activity to continue, albeit under greater scrutiny. In the case of Alibaba, it has imposed a US$2.8 bn fine, equivalent to 4% of annual revenue, and strict but not oppressive rules on a range of issues from pricing to personal data. The key item is an end to forced exclusivity agreements locking businesses to one platform. In the case of Ant, regulations are stricter: the financial group is now a holding company with its varied arms overseen by financial regulators, including a credit origination platform, investment technology unit and insurance operations. The IPO will go ahead (timing unknown),but valuation is likely drop by around 30%-60% (onshore brokerage estimates) from pre-crackdown levels.
Clarity on fintech and trust regulations removes worst-case scenario risk for tech sector. This month, the State Administration for Market Regulation (SAMR) set a one-month deadline for the 34 largest-platform internet companies to rectify antitrust violations and make their compliance commitments public. The regulations imposed by PBoC on Ant will also apply for the host of copycat firms. So, too, will the rulings on monopoly practices: ending forced exclusivity, dynamic pricing, etc. More fines are coming. Meituan, which accounts for 60% of the food delivery market (now under investigation), and Didi (China’sUber), which is a widely suspected practitioner of dynamic pricing, are two likely candidates. Nevertheless, the worst downside risk has passed: nationalization and forced break-ups are not on the agenda. Indeed, alongside the regulatory measures, authorities have offered grudging recognition of the internet giants’ importance for economic activity.
The anti-monopoly push will continue;it is a structural shift driven by far more than the politics of Ma vs the Party. Beijing has a number of major interrelated goals; greater control of the tech sector, supporting SMEs and promoting domestic innovation. In the case of fintech regulation, financial stability and risk control is the focus, as the PBoC made clear last December. Ultimately, aligning corporate interests with the Party means lower profit/revenue growth potential.
Data is the next frontier. Authorities want better access to big tech’s private information and the ability of emerging firms to easily acquire data. To this end, data was last year classified as a “production factor”, joining other key inputs such as land and credit. Providing user information to Beijing is not a major threat to internet companies’ bottom line. However, if authorities mandate subsidized data provision, in a similar manner to cheaper credit, it will damage one of the “moats” surrounding large-platform economy firms. National data standards are in the works. A pilot data trading exchange launched in Beijingsuggests authorities are slowly moving towards the creation of national market for anonymized and standardized data.
The new regulations are a clear win for SMEs, small cap technology and traditional finance. The end of forced exclusivity opens up wider markets for smaller retailers. Businessesc can now list goods and services on multiple platforms without fear of reprisal. Moreover, the intense competition between e-commerce groups means that Alibaba et al now need to incentivize SMEs to keep business on their platforms. The ruling should improve terms and cut delays in payments to suppliers and businesses, reducing pressure on strained SME account receivables.
Disintermediation of traditional finance will decelerate. Ant Group is backing down on its more aggressive expansion strategies, and the rest of the sector will follow. The migration of consumer deposits and investment towards fintech is unlikely to halt: the data advantage of platform economy over typical lenders is too great, but the competition is now more even and the pace of expansion is likely to slow. The launch of the digital RMB and its payment infrastructure may also help traditional finance compete with big tech.
Start-ups will, in theory, have improved access to data, neutral (as opposed to discriminatory) algorithmic and pricing treatment and a better chance of growing independently rather than being forced into a partnership with an existing tech giant, which will be a positive for innovation. The Alibaba/Tencent duopoly influences how start-ups develop: traditional goals of brand-and platform-building are swapped for the target of a buyout by Alibaba or Tencent. The result is a lowering of ambition and, potentially, innovation as well.
Anti-monopoly rules are likely to reshape the PRC consumer internet. In 2013, after Tencent launched WeChat pay, Alibaba blocked access to its products via WeChat. Tencent reciprocated:links and website addresses related to Alibaba group were blocked on the company’s messaging software. For eight years there has been a clear divide between Alibaba and Tencent ecosystems, by far the two largest groupings in China with a combined monthly active user count (MAU) of 1.9bn. The practice extends more broadly with WeChat blocking links to Bytedance (Tiktok) and other competitors.
WeChat is China’s operating system; it is difficult to convey how central the app is to daily life in the PRC. Suffice to say Tencent has over a billion monthly active users, which is more than double Alibaba’s. Control of “internet traffic” enables Tencent to funnel users towards its portfolio companies, while starving rivals of new customer inflows. Unsurprisingly, Tencent and its linked companies have triumphed in the major battles for online market share, and this is reflected in its stock outperformance. Today, Tencent holds equity stakes in leading firms in ride hailing (Didi), food delivery (Meituan) and Alibaba’s two largest e-commerce rivals, JD.com and Pinduoduo, among others.
Alibaba attempts to redress this shortage by acquiring other traffic-generating sites show,BABA’s difficulty in attracting consumer eyeballs and that by consequence the firm’s largest acquisitions tend to be social media/content-driven. In contrast, Tencent focuses, very successfully, on taking stakes in companies that can convert its long standing traffic dominance into monetary transactions.
Tencent’s walls are coming down. The abovementioned practices constitute unfair monopoly behaviour under SAMR’s new regulations. This month Alibaba opened a mini app within WeChat,targetingPinduoduo. Alibaba and other rival programmes are in the approval pipeline, In the current politically charged climate, Tencent cannot block the applications. What does this mean for investors? If the new regulations are properly enforced, a key advantage of the Tencent eco-system is reduced–to the benefit of Alibaba and others. How much this levels the playing field will depend not only on enforcement but also on how individual firms are able to game the new set of rules. SAMR is understaffed and is widely viewed as targeting Alibaba in order to bring the other tech firms in line or, as a popular saying goes, “killing a chicken to scare the monkeys”. The Alibaba example should guarantee compliance for now.