The Economist - UK (2022-05-07)

TheEconomistMay7th 2022 Business 61

Beijing’s regulatory crackdown has
greatlydiscouragedrisk­taking.Tencent’s
forayintoonlineeducationin 2019 isnow
a deadend,asisthatwholeindustry,after
sweepingnewruleswereenactedlastyear
on the services that can be offered to
school­agepupils.Investorswantnothing
todowithChinesefintechafterAnt’sini­
tialpublicofferingwascrushedbyCom­
munistPartyleadersinlate2020.Forget
aboutmassivedata­crunchingbusinesses,
too,wherethegovernment’snewframe­
workforcontrolandownershipofperso­
nalandfinancialdatawilllimitprivatein­
novation.Onlinevideo­games, Tencent’s
chiefrevenue­generator,have alsocome
under attack. The government has sig­
nalled it willno longer tolerate private
investmentinnews­gathering,puttingMr
Ma’smediaempireatrisk.Itmayevenbe
planningtotakesmallstakesintechfirms
inordertoguidetheirdevelopment.
Thecompanies’strategiesreflectlimit­
edoptionsforrapidgrowth.TakeAlibaba
anditsthreecoreareasofoperation:inter­
national,suchasLazada,ane­commerce
businessbasedinSingapore;withinChi­
na,dominatedbye­commerce;anda tech
divisionthatcountscloudcomputingas
itsbiggestengineofgrowth.
Alibaba’s solutionto a long­expected
slowdowninChinesee­commerceasthe
market becomes saturated has been to
moveintosmaller,poorercitiesacrossthe
country with the expansion of Taobao
Deals,a platformthatallowsgroupsofpeo­
pletobuyproductsatlowercost.Thecom­
pany has recently startedplaying down
thisstrategytoanalystsandinvestors,who
areunderwhelmedbyitslowmargins.
Itsglobalbusinesshasgrownrapidly,
mainlythankstothefastexpansionofLa­
zada.Butitsretailoperationsabroadhave
contributedonlyabout5%ofoverallannu­
alrevenues since2017, andareunlikely
evertomakeupa meaningfulpartofthe
Alibabaempire.Itsprospectsofbreaking
into developedmarkets inAmerica and
Europeareclosetonon­existent.Someof
thatpessimismisbasedonAmerica’sin­

creasingdistrustofChinesecompanies.In

2018 Ant’sattempttobuyanAmericanpay­

mentsfirmwasshotdownbyregulatorsin

Washingtononnational­securitygrounds.

ThishaspromptedAlibabatofocusmore

on developing markets with much less

spendingpower.

Chineseregulators,too,haveclamped

down onthetechtitans’ foreigninvest­

ments.Theyhavealsosteppeduppreven­

tionofmonopolisticbehaviourathome,

stifling domestic investments. Alibaba

wasoneofChina’sbiggestcorporateac­

quirersin2018,whenitpulledoffabout

$18bninmergersandacquisitions.In 2021

thatslumpedto$5.7bn,overfour­fifthsof

whichwasspentwithinChina,according

toRefinitiv,a datacompany.Themoreac­

quisitiveTencent’sdealmakingwasvalued

at$20bnlastyear,down from$32bn in

2018;thecompanyalsosoldabout$16bnin

shares injd.cominDecember,sparking

fearsthatregulatorswerepushingit toun­

winditssprawlingempire.

Ascustomarysourcesofrevenuecome

under further pressure, China’sinternet

giantshavegamelytalkedupa newstageof

innovation—oneinwhichtheirambitions

aredefinedbythestate.Thegovernment

wantsChinesebigtechtomakeordesign

semiconductorsandartificial­intelligence

(ai) software, and runcloud­computing

businesses.Ithasbeendesignatingspecif­

icareasforcompaniestopursue,givinga

greenlightforprivateentrepreneurstogo

afterthenextbigthing,aslongasitlines

upwithpolicygoals.Baidu,bestknownas

China’s online­search champion, is the

government’s first choice forleading ai

andautonomous­drivingbusinesses.On

April28ththefirmwasawardedChina’s

firstpermitfordriverlessride­hailingon

publicroads.

Manytechfirmshavetakenthehint.

Alibabareliesheavilyonthesuccessofits

cloud­computing division, which leads

themarketandbroughtin8%oftotalrev­

enueinthelastquarterof2021.InFebruary

Daniel Zhang, Ailbaba’s chief executive,

toldanalyststhatcloudcomputingcould

bea trillion­yuanbusinessby 2025 andbe

transformedintohisfirm’smainactivity.

TencentandBaiduhavelargeandgrowing

cloudoperations,too.Mostbusiness­to­

businessserviceswillonedaybedomin­

atedbytheincumbenttechgroups,says

ElinorLeungofclsa, aninvestmentbank.

Suchtop­downdelegationofentrepre­

neurialactivitycannotbecompletelywrit­

tenoff, says DavidHsuoftheWharton

SchoolinPennsylvania.State­backedre­

searchanddevelopmentiscommonplace

in eventhe most market­driven econo­

mies.ThemomentumbuildinginChina

may eventually enhance the underlying

technologiesonwhicha newwaveofen­

terprisewilltakeroot.

Bottlingupthegenie

Findingstate­endorsedtechnologiestoin­

vestinispoliticallyexpedientforthelarg­

estinternetplatforms,saysRobinZhuof

Bernstein,a broker.RobinLi,Baidu’sfoun­

der,hasembracedhisfirm’sparty­picked

missionwithsuchzealthatheevenwrote

abookonautonomousdrivinglastyear.

Yetevenself­drivingcarsandotherstate­

backedprojectswillprobablyfallshortof

thegrowthratestowhichthecompanies

becameaccustomedintheheady2010s.

Alibabaisagaina caseinpoint.Aliyun,

itsparty­approvedcloudbusiness,hassuf­

feredbig setbacksrecently. It lostByte­

Dance,theownerofTikTok,Westernteen­

agers’favouritetimesink,asa customer.A

steadystreamofstate­controlledcompa­

nies are leaving it for cloud platforms

ownedbyotherstategroups.China’sbig

telecoms firms, which have competing

businesses,areexpectedtoeatupmarket

share in the lower­value­added part of

cloud services.There are limitsto how

muchAliyuncanearninforeignmarkets,

wherea distrustofChinesetechnologyhas

ledtothebanishmentoftechcompatriots

such as Huawei, a telecoms­equipment

maker.Aliyun’srevenuesgrewby20%year

onyearinthelastquarterof2021.Notbad,

youmightthink.Butmuchslowerthan

analystshadanticipated.n

The great fall of China

Market capitalisation, $trn

Source: Refinitiv Datastream

2

2.5

2.0

1.5

1.0

0.5

0

2019 20 21 22

Pinduoduo

JD.com

Meituan

Alibaba

Tencent

Deal-brakers

Sources:Bloomberg;Refinitiv *Including debt †To April 19th

1

80

60

40

20

0

21201918171615142013

Tencent

Alibaba

40

30

20

10

0

201 20 22†

Alibaba

China Overseas

40

30

20

10

0

201 20 22†

Tencent

Revenues, % increase on a year earlier Acquisitions*, $bn