Newsletter #26 (Premium): China has looked at the power of the BigTech monopolies in the USA and said "not happening here!"...and they mean business!
For the last forty years or so, China has been steadily and systematically reshaping itself into a market economy. Whilst the popular narrative of China is as an authoritarian command and control state that watches everyone and oppresses everything, the reality is that China has been strategically building a technology infrastructure for a 21st-century digital economy.
In this week's Wiser! Newsletter, Rick Huckstep takes a look into what's going on with China's Big Tech Crackdown. And contrasts the difference in approach between Beijing and Washington when it comes to policy decisions aimed at the BigTech monopolies.
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China’s Big Tech giants have built massive monopolies with flywheel network effects to power China's digital economy. This is best illustrated in the way that the country’s payment system has moved from cash to cashless, with Ali Pay and WeChat Pay dominating.
After a decade of a hands-off approach to China Tech, especially in financial services and e-commerce, China has decided its time to take action. In no small part, by looking at the power and influence of the Big Tech monopolies in the United States and saying "this ain't happening here".
It started late last year when Chinese regulators pulled the plug on Ant Group's massive IPO at the 11th hour.
Ant IPO
Ant Group is part of the Alibaba Group, a Chinese multinational e-commerce, retail, and financial services technology company often called the "Amazon of China". Ant includes Alipay, the largest Fintech company in the world.
Last November, Alibaba was forced to scrap the Ant IPO at the last minute. The floatation was expected to raise $37 billion and value the company at over $300 billion.
This state intervention appears to have been instigated after Alibaba founder Jack Ma, the richest man in China, gave a speech. The Speech.
The Speech was on October 24th and Ma pulled no punches. He was openly critical of China's financial services industry, likening it to "an old people's club." He also criticised regulators and Bejing.
A week later, the Shanghai Stock Exchange forced the cancellation of the IPO.
Alibaba's stock immediately fell 8% on this news, which cost Ma over $3 billion in value. Ma then disappeared from the public eye and has hardly been seen since, fuelling a ton of conspiracy theories!
Pulling the plug on the IPO was reported to have been on the direct instructions of President Xi Jinping.
The YouTube of The Speech is in the Sources section at the end of this article.
Since then Beijing has increased its scrutiny and undertaken a broad crackdown of its technology sector. The casualties include some of China’s leading tech companies, such as Tencent (the internet conglomerate), Meituan (food delivery), Pinduoduo (e-commerce), Didi (ride-hailing app), Full Truck Alliance (truck-hailing app), Kanzhun (recruitment), online private tutoring companies like New Oriental Education and TAL Education, and a crackdown on cryptocurrencies.
Alibaba, the world's largest e-commerce firm were hit with a record US$2.8 billion fine in April for anticompetitive behavior in the new wave of anti-trust investigations. (Alibaba was founded by Jack Ma and is often described as China's version of Amazon, only bigger...see the end of this article for an interesting comparison of Amazon versus Alibaba.)
Didi IPO
Scrutiny of China Tech intensified when Didi Chuxing, the Chinese version of Uber, went ahead with a US$4.4 billion IPO in June. The ride-hailing service made its debut on the New York Stock Exchange on 30th June at a valuation of $68 billion on 2020 revenues of $21.6 billion.
Although there are several other ride-hailing apps in China, DiDi is the undisputed market leader and is estimated to have over 90% market share.
This was the biggest IPO of a Chinese company on an American exchange since Alibaba in 2014, which raised $25 billion.
Prior to the floatation, Didi's management team had been advised by China regulators not to go ahead with the IPO, but they did it anyway.
And they did it a day earlier than planned, which was probably nothing to do with making sure the listing happened without interference or the $3.5 billion of options that investors had allocated to themselves prior to the floatation!
Within days, Didi was instructed by the cybersecurity regulator to stop taking new customer registrations, on grounds of data security. This was then followed by an instruction to remove its 25 or so apps from the Chinese app stores of Apple, Google, and WeChat.
Beijing’s policy offensive rapidly expanded and investigations began at a wide range of tech companies. Meanwhile, over on the stock market, investors woke up to the notion that they could no longer value Chinese stocks in the same way they valued US firms.
As a result, over $400 billion was instantly wiped off the valuations of Chinese tech companies traded in the US. One casualty was early-stage investment business Softbank, which owned 22% of Didi.
Softbank needed the proceeds of the IPO to cover major recent losses from investments such as WeWork. The collapse of Didi’s stock price cost Softbank roughly $4 billion and shrank the value of Uber’s 13% shareholding in Didi by about $2 billion.
Uber took a second hit when Softbank began selling one-third of its stake in Uber in order to replace some of the cash its Didi stock was supposed to generate.
Meanwhile, TikTok parent company Bytedance has very quietly shelved its IPO plans, according to CNBC.
"First, China’s government is not a monolith. Even though they only have one political party, that does not mean there is only one center of power. The Government and the Party are beset by all sorts of rivalries and vying interest groups. There is a constant struggle between the Center and the Provinces. There are ministries jockeying for power and regulatory bodies for jurisdiction. Some of that is on display here as the relatively new Cyber agency has reportedly emerged as the arbiter of which tech companies can go public."
Add to this that 2021 is the 100th anniversary of the China Communist Party: a time for reflection on the past and defining new beginnings.
And then you have to look at what's happening in Hong Kong and the preparations to make this the gateway between China and the Western financial and economic markets.
In the interests of the people, not rich capitalists
Ray Dalio, the founder of Bridgewater Associates, the world’s biggest hedge fund, wrote this about China in an article on Linkedin over the weekend:
“To understand what’s going on you need to understand that China is a state capitalist system which means that the state runs capitalism to serve the interests of most people and that policy makers won’t let the sensitivities of those in the capital markets and rich capitalists stand in the way of doing what they believe is best for the most people of the country.”
The prevailing media narrative in the West is that the Chinese Communist Party will squash anything that presents a threat to its absolute political authority...even if that means cutting off its nose to spite its face.
The popular narrative goes that the CCP will think nothing of frightening off foreign investment or impose hardships on the very entrepreneurs and innovators that have made the Chinese people much richer.
Whilst there is no doubt that the CCP, like any political party in power (see Conservative government the UK), will seek to protect its hegemony, it's not quite as simple as this power play narrative implies.
Beijing has looked at the US and the environment that BigTech operates in, and decided that this is not what it wants in its backyard.
China is taking a series of proactive steps to move early, unlike the US, where regulatory oversight tends to come way after the event, where tech firms are able to ignore laws and regulations that have been put in place to protect public interests.
Uber and Robinhood are cases in point.
The Uber model rode roughshod through existing ways of working, ignoring laws along the way, as it expanded at pace. Fuelled by a massive pile of investor cash, Uber's sole purpose was to establish marketshare and global brand domination. (It failed in China because Didi gave Uber a taste of their own medicine and undercut them. Didi bought Uber's China business from them in 2016).
Then you have the newly IPO'ed trading app Robinhood. Their latest fine of $70 million is no more than a rounding error compared to Alibaba's recent fine of $2.8 BILLION. Read about Robinhood here on Wiser ($).
The three areas of focus for China's Big Tech Crackdown
1.Anti-trust
Alibaba was the first to fall foul of China’s new focus on anti-trust. The State Administration of Market Regulation, aka SAMR, is China’s market watchdog and they handed down a record fine of $2.8 billion for anti-competitive behavior.
Then, 34 of China's Big Tech firms were given instructions to change their online behavior, including Tencent, Meituan, Didi, Baidu, ByteDance/TikTok, JD.com and New Oriental Education.
In just 3 months, since the April fine to Alibaba, SAMR has fined most of these 34 other Tech firms for actions that include failing to disclose mergers, signing exclusive contracts, misleading marketing tactics, and other “merger irregularities.”
By contrast, the US lawmakers seem hopelessly slow and ill-equipped to apply anti-trust scrutiny to Big Tech.
There are 2 issues that get in the way of anti-trust in the US.
First, the laws were not written for a “when the product is free” market. US anti-trust is based on price competition and wasn’t intended for a monopolistic free-to-consumer market (how do you judge Facebook or Google as anti-competitive when they give their products "for free" to all users?).
The second is the inability of largely aging American politicians to grasp the very basics of Big Tech. As illustrated by Republican Senator Orrin Hatch who asked Facebook CEO Mark Zuckerberg, "How do you sustain a business model in which users don't pay for your service?"
Beijing has made no secret of the importance of developing and controlling “big data”. Overseen by the Cyberspace Administration of China, aka CAC, the agency is in charge of China’s enormous censorship apparatus, and ensuring that the data of Chinese citizens collected by private companies does not make it out of the country.
The regulator has raised “national security” concerns about Chinese companies doing IPOs abroad, with a fear that "the data" will fall into foreign hands. Which of course is exactly the fear that US lawmakers and regulators have about US data in the hands of Chinese owned firms!
Although frankly, it is hard to see what strategic importance there is in Didi's Chinese passenger ride-sharing data for the US, or the strategic value of US TikToker's data to the CCP! (This is where tech policy and geopolitics intertwine...I'll stick to the tech!)
Earlier this year, Tesla sales were temporarily halted after China expressed concerns about Tesla data collected in China being held overseas. A fifth of Tesla's sales are in China and they acted quickly by announcing they would store data domestically after meeting with the cyberspace regulators.
On Friday of last week, a new regulator focused on cybersecurity at the Ministry of Industry and Information Technology (MIIT) summoned 12 major tech companies, including Alibaba, Tencent and ByteDance, to instruct them on how to improve their operations to comply with China’s new Data Security Law.
China’s Data Security Law comes into effect in September and includes financial penalties for firms that transfer "core data" overseas without proper authorisation from the government.
What this really meant was a policy decision to prevent “growth at the expense of the public interest”.
One area where this policy is clearly in play is with gaming apps.
There is a genuine concern about online gaming addiction and its overuse, especially amongst young people. A state-run news agency in China just reported that video games are like "spiritual opium".
The story hit Tencent's stock by 10% immediately after the story broke.
In response to the article, Tencent said that it will institute stricter limitations on minors' playtime in Honor of Kings. Young gamers will be limited to one hour per day during the week and two hours per day on weekends and holidays. Anyone under the age of 12 will not be able to make in-game purchases.
What is clear is that China does not want a Western neolibel free-for-all that allows a free market to run away with itself unchecked at the expensive of its citizens. It may be ideologically unsavoury to see this level of state interference, but the intention is to protect lives before livelihood, with all of its Marxist overtones.
Alibaba ships to 190 countries and will do so within 72 hours for just $3. Compare to Amazon Prime costing approximately $119/yr and is available in only 21 countries.
𝗔𝗹𝗶𝗯𝗮𝗯𝗮 𝗶𝘀 𝗰𝗵𝗲𝗮𝗽𝗲𝗿 𝘁𝗵𝗮𝗻 𝗔𝗺𝗮𝘇𝗼𝗻
Alibaba has direct access to Chinese factories and thereby eliminates the middleman and making products cheaper. In fact, Amazon is even 10-30% more expensive than Walmart or Target.
𝗔𝗹𝗶𝗯𝗮𝗯𝗮 𝗵𝗮𝘀 𝗺𝗼𝗿𝗲 𝘀𝗰𝗮𝗹𝗲
On Singles Day (runs 11 days) Alibaba generated sales of $75 billion which is more than all Black Friday, Cyber Monday and Prime ecommerce (not just Amazon) sales combined. It is estimated Alibaba moves 3x more products than Amazon.
𝗔𝗹𝗶𝗯𝗮𝗯𝗮 𝘃𝘀 𝗔𝗺𝗮𝘇𝗼𝗻 𝗥𝗼𝗯𝗼𝘁𝗶𝗰𝘀
Where Amazon has more robots in the warehouses (400k), Alibaba is going beyond that and using robots today (with 100k more planned) for the last-mile. This is significant because 50% of logistics costs are in the last mile.
𝗔𝗹𝗶𝗯𝗮𝗯𝗮 𝗴𝗹𝗼𝗯𝗮𝗹 𝗹𝗼𝗴𝗶𝘀𝘁𝗶𝗰𝘀 𝗶𝘀 𝗺𝗼𝗿𝗲 𝘀𝗰𝗮𝗹𝗮𝗯𝗹𝗲
Amazon is building and owning its own fleet with 40,000 trailers and 75 airplanes. Alibaba is partnering with 3,000 external logistics operators. This gives Alibaba greater flexibility and speed to capture a global market.
𝗔𝗹𝗶𝗯𝗮𝗯𝗮 𝗺𝗮𝗿𝗸𝗲𝘁𝗽𝗹𝗮𝗰𝗲 𝗼𝘂𝘁𝗽𝗮𝗰𝗶𝗻𝗴 𝗔𝗺𝗮𝘇𝗼𝗻
Many large brands are foregoing the Amazon marketplace due to counterfeit concerns, Alibaba’s TMall has grown by more than 40% year-over-year.
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