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Home » China’s Big Tech clampdown: Why some businesses stand to benefit

China’s Big Tech clampdown: Why some businesses stand to benefit

After allowing entrepreneurs like Jack Ma to grow their businesses into internet giants, Beijing is now reining them in.

January 26, 2021
in Tech
7 min read
China’s Big Tech clampdown: Why some businesses stand to benefit
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Shenzhen, China – For Nicole Gao, Taobao Live is a lifeline.

The Shenzhen-based businesswoman uses the live-streaming platform owned by Alibaba, China’s dominant e-commerce company, to sell beauty products such as facial masks, skin tightening creams, and moisturisers to online audiences of up to 30,000 at a time.

That may sound like a lot, but her revenue of more than $71,000 for the first two weeks of 2021 is less than half of what it was before the coronavirus pandemic struck a year ago. Back then, she had built up a lucrative business supplying more than 200 spas across mainland China, Hong Kong, Singapore and Indonesia. COVID-19 has shuttered many of them, and it remains unclear as to when – or if – they will reopen.

Even though her business has slumped, Gao has little option but to continue using Taobao Live because of its enormous reach, despite the company taking a 3 percent slice of her sales and charging a service fee, further squeezing her margins.

Nonetheless, Gao takes a fairly sanguine view of the situation.

“I think it’s fitting that they charge us because we’re using their platform to promote our products but of course, we do hope they can charge us less,” Gao, 33, told Al Jazeera from her office, surrounded by boxes of skincare products and computer hardware.

“[I use] Taobao Live because it accurately connects us with clients who need these kinds of products,” she said.

But some other businesses have not been as accepting of Alibaba’s ability to dictate terms.

With its digital platforms Taobao and Tmall, Alibaba has become the world’s biggest retail and e-commerce company.

Alibaba controls nearly two-thirds of China’s online retail market [File: Qilai Shen/Bloomberg]

In China, it commands 62 percent of the country’s online retail market, according to investment firm Daiwa Capital Markets. Its closest competitor, JD.com, controls about 20 percent. Alibaba’s estimated 750 million active users are more than double the number for United States-based e-commerce giant Amazon, which claims to have more than 300 million active users.

Alibaba’s growth has been meteoric. For instance, Taobao Live’s gross merchandise value, a measure of sales, has expanded by about 150 percent a year for three years, Alibaba said in a report last March.

Where giants roam

That kind of growth – and market dominance – of digital conglomerates such as Alibaba has been followed by a sudden crackdown by Chinese regulators who fear their size could lead to less choice for consumers and small businesses such as Gao’s, or worse, destabilise China’s financial system and economy.

The first sign of Beijing’s wariness of the rise of e-commerce and financial technology giants came shortly after Alibaba’s flamboyant billionaire founder, Jack Ma, made a speech in Shanghai on October 24 in which he criticised China’s financial regulators for not being innovative enough.

As he was speaking, his financial technology firm, Ant Group, was preparing for what was slated to be an initial public offering (IPO) to raise about $37bn, the world’s largest ever.

On November 3, 10 days after his Shanghai speech, Chinese regulators blocked the IPO, shocking investors around the world and sending share prices falling.

The authorities have since called for an overhaul of Ant’s business and launched an antitrust investigation into Alibaba. They have also published a draft list of new antitrust rules aimed at curbing monopolistic behaviour by giant internet platforms, covering everything from e-commerce to food delivery and more.

Ma went quiet after his speech, and was not seen in public until January 20, this time in a short, rather more muted online address to teachers about philanthropy.

While President Xi Jinping’s government has not explained what led to the draft rules, the move is likely to affect some of the biggest internet firms in China, including e-commerce giants Alibaba, JD.com and Pinduoduo, as well as food delivery platform Meituan, and social media and gaming giant Tencent, among others.

Alibaba and Tencent dominate China’s growing ecosystem of tech platforms that allow users to chat with friends and family, transfer money, shop online, take out loans, order a ride-hailing car, stream music and movies, play online games and much more.

 

[Bloomberg]

Some of the things these firms have been accused of doing include the compulsory collection of user data, treating customers differently based on their spending habits and setting algorithm-based prices favouring new users.

One of the most egregious examples of supposed arm-twisting by tech firms involves a “pick one of two” tactic, in which vendors – usually small enterprises – are forced to choose between Alibaba and e-commerce platforms such as Pinduoduo, in which Tencent is a shareholder.

While many businesses, such as beauty products seller Gao, accept the status quo, one company decided to take Alibaba head-on. Microwave maker Galanz sued the e-commerce giant for abusing its dominant market position in October 2019 but then settled the case last June.

When asked to comment about Beijing’s attempts to clamp down on tech giants, an Alibaba spokesperson directed Al Jazeera to a statement the company made on December 24 saying: “Today, Alibaba Group has received notification from the State Administration for Market Regulation that an investigation has been initiated into the Company pursuant to the Anti-Monopoly Law. Alibaba will actively cooperate with the regulators on the investigation.”

Referring to Beijing’s draft internet rules, Pinduoduo told Al Jazeera in an emailed statement: “Fundamentally, the spirit of the paper is about fair competition and promoting innovation, and our principle of being ‘More Open’ is very much aligned with that.”

Controlling the consumer

Some analysts say they are not surprised that Ma’s internet empire has finally come under such intense regulatory scrutiny, so much as they are surprised it has taken this long for regulators to do so.

A recording of a live-stream of Jack Ma addressing teachers at an annual event on January 20 after months out of public view [Justin Chin/Bloomberg]
“This is what happens when you don’t have enough competition. The platforms really control the consumer and that can really affect small businesses,” Ma Rui, a San Francisco-based technology analyst, told Al Jazeera.

“This is a huge part of the economy that you have to take care of, and if anything [the regulators] have been really slow. That should be the complaint, and not that they’re being very harsh, at least on the antitrust stuff,” Ma said.

Regulators are now digging through Ant’s payment platform Alipay and its lending practices. It has grown far beyond simply handling payments, diversifying into asset management, insurance and other lending services, raising warning signs of potential risks to the country’s banking system.

After looking the other way regarding Ant Group’s use of a local licence in the municipality of Chongqing to engage in its payment business nationwide, officials at the People’s Bank of China (PBOC) – the country’s central bank – had, apparently, seen enough.

“I’m not surprised that the pendulum swung one way and there was all this room for experimentation and now it’s swinging back the other way and you actually can’t do these things,” said Shazeda Ahmed, a visiting researcher at New York University’s AI Now Institute who has extensively studied the relationships between China’s tech industry and the local, provincial and central government.

Ahmed said there had long been an implicit understanding that the Chinese government would allow tech entrepreneurs to experiment domestically as they built their companies up in preparation to compete abroad. But, Ahmed says, at some point success can breed envy and fear.

 

[Bloomberg]

“I always felt like [Ant Group] were in the position the PBOC wanted to be in,” Ahmed said. [Ant Group] have such a big chunk of the market captured with their wealth management products. What the PBOC and others don’t understand is that [Ant] makes it so understandable to users.”

Not too big to regulate

While Alibaba may be too big to fail, it is not too large to regulate, and the recent regulatory crackdown is a warning to other big tech firms in China that they, too, had better fall into line, analysts say.

China’s State Administration for Market Regulation signalled that after Alibaba, more companies will be in its crosshairs, as antitrust actions will be its top priority for 2021, according to a Xinhua news agency interview with market regulation head Zhang Gong published on January 9.

Angela Zhang, an associate professor of law at the University of Hong Kong, likens the actions against Alibaba and Ant Group as similar to “mass campaigns” launched by the government in the past on food safety, air pollution, and other corporate behaviour it felt was getting out of hand.

“So basically it is to create a kind of deterrent effect so people understand this is serious and it is trying to deter them from committing violations,” Zhang said.

Nicole Gao says she will find ways to carry on her business regardless of regulatory hurdles [File: Nicole Gao via Michael Standaert/Al Jazeera]

“There are legitimate reasons for the government to start thinking about regulating these firms because they are so big and have a significant market position,” she added.

Recent anti-monopoly actions in the United States and the European Union against big tech have also given the Chinese government more legitimacy to take actions at home, Zhang said.

And even if the government does not dole out any real punishment related to the antitrust investigation into Alibaba, the damage has already been done, with a 30 percent drop in its share value since the rumblings began, Zhang said.

But beauty products live-streamer Gao says she is confident that she will find ways around any regulatory roadblocks that appear.

“Most of my clients outside of China are overseas Chinese, and they do use Alipay a lot,” Gao said. “But they also have many other means of money transfer, like through relatives and using bank accounts, things like that. It’s definitely going to be less convenient if that ban comes into effect, but they’ll find another way.”

Additional research provided by Jonathan Zhong.

Credit: Source link

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