The Economist - USA (2022-06-11)

The Economist June 11th 2022 Business 65

BigtechinChina

Alive. Unwell?

D

idiglobaloughttobedead.Overthe

pastyeartheChinesegovernmenthas

stopped thedomestic ride­hailing giant

fromsigningupnewusersandlauncheda

cyber­securityinvestigationintoitsopera­

tions,daysafterits$4.4bninitialpublic

offeringinNewYorklastJune.Ina seem­

inglyfatalblow,Didiisbeingforcedtode­

listfromAmericabutblockedfromrelist­

inginHongKong.Thatthecompanyhas

notcollapsedisa testamenttothestrength

of itsbusiness. Its future survival—and

that ofotherChinesetech darlings—re­

mainsinthegiftoftheCommunistParty.

TheprobeintoDidiisexpectedtowrap

upshortlyandonJune6ththeWallStreet

Journalreportedthatthefirmwillsoonbe

abletotakeonnewcustomers.Thenews

propelledDidi’ssharepriceupby60%.It

still faces an investigation in America,

whereit isallegedtohaveunderplayedreg­

ulatoryrisksinitsdomesticmarket,and

investorsaresuingitonsimilargrounds.

Buttheseproblemsseempifflingnextto

whatit hassoldieredthroughathome.

ThefirstsignthattheCommunistPar­

ty’s two­year campaignagainst bigtech

wouldeasecameinMarchfromLiuHe,a

topeconomicsadvisertoPresidentXiJinp­

ing.InMayMrLiumeta handfuloftechex­

ecutivesandspokeofsupportingthedigi­

tal economyandbalancingtherelation­

shipbetweenstateandmarket.Thepoten­

tialresumptionofDidi’sbusinessinChina

isonesignthatthingsareindeednormal­

ising. Some large tech platforms’ first­

quarter  results  were  also  better  than  ex­

pected. Meituan, a delivery super­app, said

on June 6th that revenue grew by 25% year

on year in the first three months of 2022. 

Yet China’s tech companies are return­

ing to a very new normal. Its two mightiest

tech titans, Alibaba and Tencent, are grow­

ing  much  more  slowly  than  in  the  past.

Room  to  expand  into  new  areas  beyond

their  core  businesses  (e­commerce,  and

social  media  and  video­gaming,  respec­

tively) has all but vanished. Outspoken en­

trepreneurs such as Jack Ma, Alibaba’s co­

founder, are a thing of the past. Tech exec­

utives  instead  parrot  official  lines  about

ending  their  industry’s  “reckless  expan­

sion” (which has also meant laying off tens

of thousands of employees). And the state

is taking direct stakes in their firms.

Not  long  ago  global  investors  shud­

dered  at  the  prospect  of  state  ownership.

Now some are coming around to the idea.

When  Bloomberg  reported  on  May  27th

that  faw,  a  state­run  carmaker,  was  plan­

ning to buy a large stake in Didi, the ride­

hailer’s  share  price  surged  by  10%.  A  big

state investor such as fawcould help Didi

navigate  compliance  and  governance  is­

sues, explains Cherry Leung of Bernstein, a

broker.  State  investors  have  been  eyeing

the  consumer­lending  and  credit­scoring

businesses  of  Ant  Group,  Alibaba’s  finan­

cial affiliate at the heart of the techlash. 

Once  viewed  as  a  drag  on  profitability,

backing  from  a  powerful  government

group  is  increasingly  seen  as  a  precondi­

tion for big tech firms to remain going con­

cerns.  It  may  be  the  only  way  for  compa­

nies that have fallen foul of Mr Xi, and his

grand  plan  for  achieving  “common  pros­

perity” in China, to stay alive. Investors ap­

pear  happy  to  forget  about  Didi’s  death

throes now that the firm has been resusci­

tated.  They  would  be  wisetoremember

that  China’s  leader  has  changedhismind

before—and could do so again.n

S HANGHAI

Investors seem willing to forget Didi

Global’s near-death experience

It was Xi’s call

inFebruary.Inditex, which has more than
500 shops in Russia, derived 8.5% of its op­
erating  profit  from  the  country  in  2021.
This year it has had to make a €216m provi­
sion for the estimated cost of the war to its
Ukrainian and Russian businesses. 
Beyond  eastern  Europe,  fashion  retail­
ers  are  being  squeezed  by  competition
from  Shein,  an  online­only  challenger
from China that has sashayed into Western
wardrobes in the past few years. And then
there is the twin “stagflationary” challenge
of higher costs and flagging demand. This
is acute for clothes pedlars, since many of
their  customers  have  already  replenished
their closets—and a new pair of trousers is
a  less  urgent  need  than  energy,  food  and
rent, all of which have been getting pricier.
No  fast­fashion  house  is  immune  to
these forces. But with the exception of the
Russia­Ukraine war, Inditex does look less
vulnerable  than  the  others.  Shein,  whose
items sell for an average of $20 or so, poses
less of a direct threat to the Spanish com­
pany’s  mid­market  frocks,  which  go  for
just  under  $40  at  Zara,  according  to  esti­
mates by Anne Critchlow of Société Géné­
rale, a bank. In recent years Inditex has also
done a better job than its rivals of unifying
its  online  operations  with  its  more  than
6,000  shops  around  the  world,  thanks  to
clever  radio­frequency  trackers,  an  in­
house  digital  platform  and  a  group­wide
inventory database. 
Crucially,  Inditex  enjoys  one  more  ad­
vantage over rivals when it comes to inven­
tory, the management of which is particu­
larly important in times of stagflation (see
previous  article).  The  company  produces
around two­thirds of its items in Europe or
in nearby north Africa and Turkey. That al­
lows it to adjust output more quickly in re­
sponse  to  demand  than  firms  like  h&m,
which  sources 80%  of  its  clothes  from
Asia. In a slowdown it pays to be faster in
fast fashion.n

Blurry prospects