In April, May and June, China’s rival internet giants, Alibaba Group Holding and Tencent Holdings, did something unprecedented: they downsized.
On Aug. 4, Alibaba, the e-commerce powerhouse, reported that sales for the months fell 0.1% from the year-ago quarter. Two weeks later, Tencent, the world’s largest distributor of online games, said annual revenue fell by $20 billion, or about 3%, over the same period. The announcements ushered in nearly two decades of rapid expansion for the two companies and, according to some analysts, herald the end of an era for China’s once-high-flying internet “platform” companies.
“Blowing growth rates [for Chinese internet companies] now look like a historical curiosity and are unlikely to return even after the current economic slowdown has passed,” said Brock Silvers, Chief Investment Officer of Kaiyuan Capital.
The end of the “platform” era
Founded in the late 1990s, Alibaba and Tencent were among the earliest and most successful platform companies – pioneers in a new category of Chinese companies that used the internet and algorithms to build digital platforms that delivered goods and services to hundreds of millions could become the consumer lightning fast. The group, which included about 10 major players funded mostly by foreign venture capital and share sales on foreign stock exchanges, experienced a spectacular boom in the 2010s. According to Nicolas Véron and Tianlei Huang, researchers at the Peterson Institute for International Economics (PIIE), between 2014 and 2019 the market value of China’s eight largest platform companies exceeded that of the country’s other 100 largest private companies combined.
But this party is over. At the direction of President Xi Jinping, the Chinese government has launched a sustained and systematic regulatory onslaught against platform firms that has fundamentally reduced expectations for their future growth.
Alibaba and Tencent were among the hardest hit by the crackdown that began in November 2020, when Xi ordered the cancellation of a $38 billion IPO for Alibaba’s digital payments subsidiary, Ant Group, within the 11th hour. In early 2021, Beijing fined both Alibaba and Tencent billions of dollars for anti-competitive behavior. This year, the two companies are also struggling to cope with the sharp slowdown in China’s economy. In China’s April-June Quarter Growth slowed to 0.4%, It’s the weakest in two years, as Beijing responded to COVID-19 outbreaks by ordering month-long citywide lockdowns.
Ant was forced to reorganize itself as a financial holding company regulated by the Chinese central bank; selling stakes in its most lucrative businesses, such as lending and credit checking, to other groups, including state-owned companies; and shrink a proprietary money market fund that was once the largest in the world. end of July, the Wall Street Journal reported that Alibaba and Ant co-founder Jack Ma offered to cede control of the group, a move that would likely please authorities and reduce Ma’s official control – but would further delay Ant’s IPO.
The growth of Tencent, the world’s largest video game developer, has been hampered by a delay in regulatory approvals for new game licenses — the company hasn’t been allowed to release a new title for nearly a year — and by a government regulation issued last year restricting gaming time for young people .
China’s COVID lockdowns hurt Alibaba’s bread-and-butter e-commerce business, squeezing consumption and disrupting supply chains and logistics operations. According to Tencent, the slowdown contributed to a double-digit quarterly decline in online ad sales. Both companies say they are cutting costs and reducing headcount.
The companies’ efforts have wiped out more than $1 trillion of their combined market value. Even inveterate China optimists jump at the exits.
Barely a week after Alibaba’s earnings announcement, SoftBank CEO Masayoshi Son confirmed that he will divest about a third of his company’s estimated 23.7% stake in Alibaba to shore up the Japanese conglomerate’s own financial position. SoftBank is Alibaba’s largest shareholder, and Son, who funded Alibaba founder Jack Ma with a $20 million investment after a brief meeting in 2000, was one of the Chinese company’s most enthusiastic supporters.
Days later, a filing with the US Securities and Exchange Commission revealed that Bridgewater Associates, the world’s largest hedge fund, sold all of its stakes in Alibaba and four other major Chinese tech companies in the three months ended June 30. Billionaire Bridgewater founder Ray Dalio was an outspoken Chinese bull who dismissed the swings in Chinese markets over the past year as little more than “wobbles.” Notably, however, Bridgewater has maintained its stake in Tencent.
And in June, Tencent’s biggest backer — Dutch investment firm Prosus NV — said it would slash its 28.9% stake in the company, ostensibly to fund share buybacks.
“Since the fourth quarter of 2020, we have seen a sharp change in direction and the ‘system’ is now officially undergoing a phase change, marking the end of the previous pattern in China,” wrote George Yang, Hong Kong’s chief investment officer, Anatole Investment Management, in a statement to investors why the company would move capital from China to the US: “What will emerge after this phase change? A new pattern? A bold new world? I don’t know, but one thing is for sure, it won’t be the world we used to know.”
The platforms maintained their dominance of the Chinese stock market through 2020, when they collectively quadrupled in value to over $2 trillion, according to the PIIE. Alibaba and Tencent not only became two of China’s most powerful companies, but some of the country’s most important investors.
Tencent, in particular, has invested in “everything,” as tech writer Pan Luan told CNN in 2018. By 2021, Tencent had accumulated an estimated $259 billion investment war chest by investing in dozens of Chinese and foreign startups, creating a whole ecosystem of apps and companies that could feed into its main social networking platform. Alibaba also bought stakes in dozens of companies, albeit on a much smaller scale than Tencent. Last year, Alibaba’s investments were valued at $26 billion Wall Street Journal.
But China’s tech crackdown has boosted platform companies to their size. From 2020 to 2021, the collective market capitalization of Chinese platform companies among the top 100 companies in China fell from over US$2 trillion to under US$1.5 trillion.
Meanwhile, Alibaba and Tencent have put the brakes on their ambitious expansion plans.
“During the second quarter, we actively exited non-core businesses, streamlined our marketing spend and cut operating expenses,” Tencent CEO “Pony” Ma said on a earnings call last Wednesday. Reuters also reported last week that Tencent intends to sell a large chunk of its 17% stake in meal delivery app Meituan, which is valued at an estimated $24 billion. (Tencent executives called Reuters report “inaccurate” when asked on the conference call.)
“Tencent has become more conservative about where they invest,” said Rui Ma, Chinese tech investor and host of the Tech Buzz China podcast. “I’m not saying they weren’t careful with their cash management before, but they’re basically taking some profits off the table.”
According to Alibaba CFO Toby Xu, Alibaba also plans to reduce spending.
“In the coming quarters and the rest of this fiscal year, we will continue to pursue the strategy of cost optimization and cost control,” Xu said on a recent conference call.
The Chinese government has forced Alibaba and Tencent to lower their ambitions, likely ensuring the once-dominant platforms will never return to their previous highs.
“My personal guess is that platforms are unlikely to be able to do this [collectively] regaining their dominance in private sector market capitalization as they did five years ago,” says Véron.
Henry Gao, Associate Professor of Law at Singapore Management University, argues that the losses suffered by Tencent and Alibaba and their investors are not worrying Chinese leaders. “The demise of Big Tech… will probably be seen as a good liberation [by the Chinese government].”
the new world
Some longtime Chinese investors appear to have abandoned China’s tech sector entirely and are refocusing on other markets.
Li Lu, founder of Himalaya Capital and advisor to Berkshire Hathaway’s Warren Buffett and Charlie Munger, announced earlier this year that he was selling his entire position in Pinduoduo, an e-commerce platform, at a 35% loss while also selling his stake to Pinduoduo Bank of America. Munger, previously an Alibaba bull, also sold some of his stakes in the company this year.
Other investors are simply trying to align their own investment strategies more closely with government priorities.
Legendary Chinese tech investor and founder of Sequoia China Neil Shen sold stakes in Meituan and e-commerce platform Pinduoduo since last year. But even amid a broader tech crackdown, Shen has noted the government’s prioritization of “deep tech” areas like robotics and artificial intelligence. Earlier this year, Shen promoted China’s quest to develop in such deep technology fields, and he is reportedly planning to deploy a new $9 billion fund away from consumer-facing platforms like Tencent and Alibaba for things like AI, semiconductor chips and robotics .
“Now is the hardest time to invest like never before,” says Rui Ma. “Anything that isn’t deep tech is being completed really, really slowly, if the deals can even be funded.”
Earlier this year, JPMorgan issued (and later withdrew) a “non-investable” solicitation on Chinese internet stocks. Months later, some investors may believe that the era of booming platforms in China is finally over.
“China’s incredible growth has long attracted massive capital despite known risks. But in a slower, more troubled economy, the “uninvestable” case suddenly looks a lot stronger,” says Silvers.