China’s Crackdown on Chinese Tech Companies

5 min read.

Earlier this year, China’s antitrust regulators slapped a record fine of US$2.8 billion on e-commerce giant Alibaba Group Holding in a landmark case. In the months following the lawsuit, Chinese regulators ordered 34 of the largest internet companies in the country to conduct a ‘comprehensive self-inspection,’ including Pinduoduo, JD.com, Kuaishou and Bilibili. 13 firms, including Tencent, Didi Chuxing and ByteDance, were also summoned for a regulatory meeting, where a stern warning was delivered requiring the companies to adhere to tighter regulations on their financial arms.

These trends demonstrate Chinese authorities’ intent to take a stricter stance in regulating large tech companies, after having taken a primarily hands-off approach previously.

Credit: Financial Times

Why was Alibaba fined?

According to the State Administration for Market Regulation (SAMR), Alibaba Group, the largest e-commerce company in both China and the world had “abused its dominant market position in China’s online retail platform service market since 2015 by forcing online merchants to open stores or take part in promotions on its platforms,” which constitutes a breach of the country’s anti-monopoly law. 

As a result, Alibaba was subjected to a fine equivalent to four percent of its total revenue in 2019. This amount was nearly three times of the previous record set by Qualcomm, the world’s largest supplier of mobile chips, who had to pay a US$945 million penalty in 2015.

Under China’s anti-monopoly law, regulators are allowed to fine Alibaba within a range of one percent to 10 percent of its annual revenue. The regulator said it settled on four percent after factoring in the “duration and degree” of the company’s misconduct, along with its “in-depth examination” and “proactive rectification.”

This landmark case will likely set the precedent for the Chinese government to use anti-monopoly rules to regulate the country’s major tech companies. According to Zhai Wei, the executive director of the Competition Law Research Centre at East China University of Political Science and Law in Shanghai, Alibaba’s case sends a clear message to the world that China will crack down harshly on any monopolistic behavior of large tech companies which are perceived to be breaching the country’s anti-monopoly laws.

Credit: Caixin Media

What is the threat of tech companies?

Over the past few years, China has become a rich source of unicorn companies, defined as privately held startups that have reached a billion-dollar valuation. As of 2020, China was home to over 200 unicorn companies, making it the country with the second largest number of unicorn companies after the United States. According to Trading Platforms, Beijing alone has 93 unicorns, including two of the top five unicorn companies in the world — Alibaba (US$140 billion valuation) and Didi Chuxing (US$62 billion valuation).

Unicorn companies often boast huge market shares within their respective industries. For instance, Alibaba’s percentage of total retail e-commerce sales stands at 55.9 percent, yielding more than half of the total retail e-commerce sales in China. Collectively, these companies have transformed the way Chinese people shop, travel, eat, invest and entertain themselves, and have become largely indispensable in the lives of many. Many of these companies, including Alibaba, have also attained dominance, if not a monopoly of their various sectors, which authorities believe pose a challenge to existing business and economic systems.

In lieu of their rapidly growing dominance, large tech companies have caused authorities to become increasingly concerned, with worries stemming from the possibility of these companies moving into the financial sphere, where they can offer unsecured loans and financial products to entrepreneurs and members of the public. This is concerning given how these companies are not subject to the same level of regulation and scrutiny as traditional financial institutions.

Hence, the antitrust investigation of Alibaba, as well as the crackdown on other major tech companies, are seen as part of the government’s effort to tame the unfettered growth of the country’s tech behemoths. This was seen as a priority amid a period of slowing economic growth especially during the COVID-19 pandemic, in order to protect both financial and social security. 

Credit: Financial Times

What are the consequences of this crackdown?

As one of the first companies to be targeted by the crackdown, Alibaba released a statement clarifying that the company will “accept the penalty with sincerity” and “ensure its compliance with determination.” The company also promised to “operate in accordance with the law with utmost diligence, continue to strengthen its compliance systems and build on growth through innovation.”

Additionally, its founder Jack Ma recently stepped down as President of the Hupan Innovation Center, an elite business academy he co-founded six years ago, shortly after stepping down as the executive chairman of Alibaba in 2019. Reports indicate that the move came as a result of political pressure from the Chinese government, amidst a harsh crackdown on Alibaba. According to Reuters, Ant Group, an affiliate of Alibaba, has also been exploring ways to divest Ma’s share in the company, following pressure from the government and after talks with People’s Bank of China (PBOC) and financial regulator China Banking and Insurance Regulatory Commission (CBIRC).

Jack Ma was not the only CEO of a major tech company to resign in recent years. Pinduoduo founder Colin Huang also announced earlier this year that he would be stepping aside as the chairman of Pinduoduo, in what was considered a shocking announcement to the public. Following suit was Zhang Yiming, founder and CEO of the largest unicorn company in the world currently: ByteDance. Zhang announced that he will relinquish his role as the chief executive of Bytedance, giving up his day-to-day responsibilities to “be more impactful on longer-term initiatives,” according to an internal memo posted on the company’s website.

According to Dr Xin Sun, senior lecturer on Chinese and East Asian business at King’s College London, many tech CEOs, including Jack Ma, Colin Huang and Zhang Yiming have “chosen early retirement and, more importantly, diluting the ownership and control rights they hold over the companies to avoid being personally targeted by the regime”, especially as the Chinese government takes an increasingly hands-on approach in the regulation of tech companies.

Credit: Reuters

In the long run, the Chinese government’s crackdown on large tech companies will likely have long-standing ramifications which might affect the entire ecosystem of businesses and economy centred around the internet. This explains why leaders of such companies are looking to take a more strategic foothold in the way they run and manage their companies, in order to strike a suitable balance between growth and finding a common understanding with Chinese authorities.