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How China’s big tech companies upset Beijing

The climate is cooling rapidly for China’s tech giants.

After years of warily allowing companies such as Alibaba and Tencent the freedom to grow without significant interference, Beijing has signalled it does not like how Big Tech is behaving.

Last week, Chinese tech stocks lost hundreds of billions of dollars in value, with Alibaba falling 12 per cent in Hong Kong, after the release of new antitrust guidelines for the sector and analysts predicted that pain was on the way.

The “extensive list of well-defined monopolistic practices . . . could be a strong signal of regulatory tightening,” said Dan Baker at Morningstar.

The guidelines came after Beijing’s last-minute halt on Ant’s $37bn initial public offering, and were followed by more rules on Friday for online shopping through livestreams, one of the fastest growing areas of Chinese ecommerce.

Observers suggested that Alibaba was the biggest target, since it now accounts for three-quarters of the country’s online sales — and nearly a fifth of China’s total retail sales. It is also moving rapidly to buy up bricks-and-mortar shops across a range of categories.

“Beijing has felt that tactics by ecommerce companies are not leading to healthy development of the retail industry . . . They don’t want three or four companies [dominating], they want 1,000s of companies,” said Wong Kok Hoi, chief investment officer at APS Asset Management. “This is big, this is a game changer,” he added.

Another analyst said the new guidelines were “totally comprehensive” in scope, covering everything from how companies should use customer data, to how they should price their offerings, to what sort of promotions and subsidies they could use to attract customers.

Walled gardens

One problem that Chinese regulators are targeting is the high barriers that tech companies have erected around their empires.

For example, WeChat, the ubiquitous messaging app from Tencent, does not allow its users to share videos from Douyin, TikTok’s sister app, or to click on links that would take them to products on Alibaba’s Taobao ecommerce site.

China's unique internet ecosystem (sharing)

Meanwhile, shoppers who want to buy goods from Alibaba’s sites, such as Taobao or Tmall, or even from its Freshippo grocery stores, or its Intime department stores, cannot use WeChat Pay, the payments service owned by Tencent which is a rival to Alipay, run by Ant, Alibaba’s sister company.

One shop assistant at an Intime department store shrugged: “We’re part of the Alibaba group.”

Alibaba chief financial officer Maggie Wu told investors this autumn: “There are many businesses within this ecosystem, so that the longer people stay, the more activities they have conducted.”

The reverse is the case at JD.com, China’s largest online retailer, in which Tencent has a stake. JD.com does not take Alipay.

Wang Qingrui, an independent internet analyst in Beijing, said companies often put up barriers as they tried to “infinitely expand their own ecosystem to squeeze their competitors”.

“They claim customers are king, but in a lot of cases they just see them as assets and they don’t want other platforms to access them,” said Mr Wang.

Under the draft regulations such tactics may be deemed as abusing market dominance. Larger platforms may also be forced to open up to rivals and even share some data.

Liu Bo, an Alibaba executive, said the regulations were meant for the internet industry generally and not targeted specifically at the company. 

“Over the past ten years new regulations have frequently been put forward and we are very welcoming of them,” he said.

China’s unique internet ecosystem (payments)

Different prices for different customers

The huge amount of data collected by Chinese tech companies through their platforms as they offer services from loans to car rides to food delivery to travel tickets, allows them to treat every potential customer differently.

A journalist at China’s state Xinhua news agency reported using three different phones to look at the same hotel room on one booking site and being quoted three different prices.

The level of subsidies offered to shoppers by tech companies, such as online shopping site Pinduoduo, can also vary as they try to win new customers.

The draft rules take aim at such price discrimination and suggest that subsidies are illegal if they hinder market competition.

Pick one of two

For years, China’s tech platforms have forced their merchants and suppliers, and even start-ups they invest in, to choose which side they are on, a practice known as “pick one of two”.

Last year, for example, the world’s largest microwave oven maker, Galanz Group, accused Alibaba of directing traffic away from its store on Tmall after it started selling on rival site Pinduoduo. Galanz said its sales dropped calamitously after it failed to show loyalty to Alibaba.

JD and Pinduoduo, both backed by Tencent, have sued Alibaba for such behaviour, alleging the company abused its dominant position to prevent merchants from selling on their platforms. Alibaba declined to comment on the lawsuit.

The same phenomenon has been reported by restaurants trying to sell their food through delivery apps. The two main participants in the Chinese market, Meituan and Ele.me, are part-owed by Tencent and Alibaba respectively. Local operators for both companies have been fined for asking restaurants to choose between the apps under existing ecommerce laws, and the new guidelines ban such practice more clearly.

“It aims to protect the interests of smaller merchants — they face challenges surviving and can easily be pressured by big platforms like Meituan,” said Li Chengdong, chief executive of tech-focused think-tank Haitun. 

Banishing grey zones

More takeovers will be subject to competition reviews under the new rules, as Beijing closes a longstanding loophole.

Many big Chinese tech groups are structured as “variable interest entities”, a complicated structure that allows them to list overseas while maintaining crucial licences for doing business in China.

But Beijing has never officially sanctioned the VIE structure and antitrust regulators have turned a blind eye to their acquisitions for fear of endorsing it.

“The practice gave tech giants an excuse not to file with regulators for those transactions which may have had competition concerns,” said Scott Yu of Zhong Lun law firm. “It has been an unspoken practice.”

Lawyers pointed to Alibaba’s takeover of food delivery company Ele.me as one deal that may have met the requirements to file for approval with competition authorities but which proceeded without a filing.

The new guidelines make clear that companies structured as VIEs such as Alibaba and Tencent must also submit their acquisitions for antitrust review. Mr Yu noted that he had received a flood of inquiries from tech companies this week.

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