Big Tech Crunch

On November 3, in a move that stunned everyone, China halted the initial public offering (IPO) of Ant Group on the Shanghai and Hong Kong exchange with less than 48 hours to go. Alibaba’s fintech arm Ant Group was expected to raise US$34.5 billion, making it the world’s largest IPO which would catapult the company to become the world’s fourth-largest financial company. 

　

The following week, on November 10 the State Administration of Market Regulation (SAMR), China’s top market watchdog, released a draft antitrust guideline on internet-based monopolies, defining for the first time what constitutes anti-competitive behavior including pricing, payment methods and the use of data to differentiate shoppers.　

On December 24, the SAMR announced an official probe into Alibaba over its “choosing one or the other” policy, under which merchants are forced to sell exclusively on Alibaba’s e-commerce platforms. The very same day, four of China’s top financial regulators including the central bank summoned Ant Group to discuss compliance issues. 　

On December 30, the SAMR announced that it had fined Alibaba-operated Tmall, Alibaba’s rival Jingdong (JD), and Vipshop each 500,000 yuan (US$76,400) over pricing irregularities. Although the fines meted out so far are insignificant, it is widely believed that these regulatory actions mark a major shift in China’s approach toward the country’s ever-expanding internet giants. 　

Often perceived to be challengers to the once dominant, mostly State-owned traditional companies, internet companies enjoyed a rather favorable reputation in the early years. Bringing convenience such as mobile payments and share bikes, many take pride in China’s leading position in certain high-tech fields, as the internet sector is a major industry where China can compete head-on with developed countries.　

To promote development in the internet industry, China took a relatively liberal regulatory approach. Take the controversial policy of “choosing one or the other” e-commerce platforms, for example. For years, Alibaba Group, which operates the dominant e-commerce platforms Taobao and Tmall, has been accused of enforcing this policy to coerce merchants and brands not to sell on rival platforms. Brands defying this rule would be either excluded from high-traffic promotions or Alibaba services, or have their listings pushed way down in search results. 　

In July 2017, China’s second-largest e-commerce firm JD released a statement accusing Alibaba of forcing merchants off JD’s sites and signing exclusive deals with Alibaba. Calling the practice an infringement on merchants’ business autonomy and consumers’ rights, JD called for the regulators to step in. 　

In April 2018, the Associated Press reported that five unspecified major consumer brands complained that traffic to their Tmall stores fell after they refused to sign exclusive contracts with Tmall. A US clothing company saw its sales plummet 10 to 20 percent. But given Alibaba’s dominant position in the e-commerce sector, few brands can risk openly challenging Alibaba over its practices. 　

In a rare case, Galanz, a Chinese home appliance brand, decided to stand up to Tmall. In two statements released in June 2019, Galanz said that after some of its executives visited Pinduoduo, an emerging e-commerce platform, the search results for its products on Tmall started to become “abnormal,” leading to plummeting sales. Galanz later sued Tmall in a court in Guangzhou, South China’s Guangdong Province, though the two reached a settlement in June 2020. 　

Many argue that Alibaba’s “choosing one or the other” policy is against China’s existing anti-monopoly law, which prohibits monopolistic agreements among business operators, and the concentration of business operators that eliminates or restricts competition. But in all these cases, China’s regulators appear to have taken a hands-off approach. 　

But as the once-small underdogs have developed into titans who dominate across industries, the perception and sentiments toward internet companies have rapidly deteriorated. 　

“When merchants are forced to sign exclusive deals and withdraw from other platforms, there will be real damage to employment and the real economy,” said a commentary in Beijing Youth Daily in September.　

“While China’s ‘dual circulation’ strategy aims to promote openness and competition, the e-commerce companies’ practices directly counter this,¡± the commentary said.　

In explaining the rationale behind the anti-trust measures, Huang Qunhui, a senior research fellow and director general of the Institute of Industrial Economics at the Chinese Academy of Social Sciences, told media in a briefing by the State Council Information Office on November 17 that platform companies may have strong incentives and capabilities to innovate in the early stages of their development, but once they have established a monopoly, they can become a force that discourages innovation in order to protect their business interests. 　

Moreover, the public attitude toward tech firms has turned hostile over time. In the past, the use of algorithms and big data was associated with more convenience and affordable products and services. But now, they are often associated with predatory practices targeting both its own workforce and consumers. 　

Earlier in September, Renwu magazine published a report detailing how China’s 4.6 million-plus food delivery riders, most of whom work for internet companies including the Alibaba-backed Ele.me and Tencent-backed Meituan, who due to the algorithm’s impossible delivery targets and shoddy route maps, have to race against time to make a living, leading to traffic violations, accidents and even death. The report led to widespread anger and heated debates about the social and ethical costs of the use of big data and artificial intelligence systems. 　

In the meantime, there are rising complaints about e-commerce companies’ use of a practice known as “big data backstabbing,” where they target user profiles to market the same product at different prices to different users, often in the form of charging higher prices to long-standing customers. This further adds to the change in sentiments to view tech giants as predatory villains rather than as innovative heroes. 　

The internet companies’ recent move to enter the business of community group buying, known as “online vegetable baskets,” also led to widespread anxiety over their influence over people’s everyday lives. A prevalent perception is that as China’s tech giants are struggling to expand overseas against the backdrop of an intensified tech war with the US, they have turned inward to competing with the little guys to secure their profits.　

“China’s internet companies have started preying on the livelihoods of aunties selling vegetables on the street, and we still call them ‘high-tech’ companies,” said an article run by ikanchai.com, a popular online tech site. 　

The issue also caught the attention of China’s Communist Party’s flagship paper People’s Daily. In an opinion piece published in November, the paper criticized internet companies for “being obsessed with quick results and short-term profits.”　

“With the advantages in big data and algorithms, internet giants should have higher goals in terms of technological innovation, rather than just eyeing profits from selling cabbage and fruit,” reads the commentary. 　

“Now the internet industry is strong enough, and the government does not want it to grow unchecked or to take control of traditional industry,” said Fei Pei, an industry analyst. “What the government wants them to do is take on more economic and social responsibilities.”　

“The recent regulatory moves indicate that the government’s focus has shifted from increasing efficiency to promoting fairness, as the authorities move to protect the interests of groups that have less negotiating power, including small- and medium-sized businesses and ordinary people,” said a report released by Shanghai-based brokerage firm Orient Securities in December. 　

The change in regulatory approach can be traced to January 2020, when China for the first time released a proposed revision to its anti-monopoly law that included the internet industry. Based on the proposed law, companies could be subject to a fine of up to 10 percent of their annual revenue for violating the law. 　

But the recent sweeping proposals appear to be more expansive in scope. In a politburo meeting chaired by Chinese President Xi Jinping on December 11, the central leadership raised a new key phrase, “the prevention of disorderly expansion of capital,” which quickly became a keynote concept in the authorities’ anti-monopoly agenda. 　

In the Central Economic Work Conference (CEWC) held on December 18, 2020, a keynote annual meeting to draft China’s economic priorities for the coming year, the importance of the prevention of disorderly expansion of capital was highlighted again. Combined with “curbing monopolistic behavior,” it is listed as one of eight major policy priorities for 2021. 　

In past years, capital expansion was a major strategy for China’s tech giants, especially Alibaba and Tencent, China’s dominant internet players. According to a report in New Fortune magazine in November 2020, Alibaba and Tencent have established what they call “digital ecosystems” that are worth 10.8 trillion yuan (US$1.65t) and 11.8 trillion yuan (US$1.81t), roughly a 10-fold increase from five years ago. 　

Indeed, there are signs that internet companies’ capital expansion and acquisitions will be subject to more strict scrutiny. On December 14, the SAMR fined Alibaba and two other internet companies 500,000 yuan (US$76,400) each for not properly making declarations to authorities about past acquisitions. 　

The market watchdog also said that it was investigating the merger of Huya Inc and DouYu International, two Tencent-backed online game streaming platforms which collectively control more than 80 percent of China’s online game streaming market.　

At the end of November, Alibaba and Tencent reportedly suspended their plan to acquire iQiyi, a Netflix-like video platform, due to the prospect of stricter regulation.　

In a statement regarding the regulator’s recent summoning of Ant Group on compliance issues, Pan Gongsheng, deputy governor of China’s central bank, said the company must “return to its origins in online payments” and prohibit irregular competition, a sign that cross-industry expansion will not be welcome in the future. 　

According to Professor Zhao Yanjing from Xiamen University in Fujian Province, platform companies’ vertical expansion should be strictly regulated. He warned that if platform companies are allowed to build their own digital cross-industry empires, they will become government-like regulators of their markets and will bend the rules to serve their own interests. 　

Zhao argued that the global challenge to regulate tech is to solve the paradox that high-level valuations of platform companies come from big data that does not belong to them but to the people. 　

The Wall Street Journal reported on January 5 that considering Ant Group’s data collection as an unfair competitive advantage over other players, the regulators are seeking to require Ant Group to share its consumer data with the People’s Bank of China, either through a nationwide credit-reporting system or a credit-rating company controlled by the bank. 　

There was also speculation that Ant Group will be split into two companies, with one taking over its financial business which will be subject to existing financial regulation, and the other taking over its high-tech businesses such as cloud computing and big data. 　

So far, it remains unclear how far China will go regarding the fate of Ant Group. But the consensus is clear now that the era of the runaway expansion of China internet firms is over.