Beijing’s most aggressive fine on record has had the discordant effect of lifting Alibaba shares 8 per cent on Monday. The Rmb18.2bn ($2.8bn) penalty is the culmination of an antitrust investigation into the Chinese ecommerce giant that began in December. Yet any optimism that this marks the end of the probe is premature.
True, the company can comfortably cover the costs. Alibaba has about Rmb312bn in cash and equivalents. The fine is equal to about 4 per cent of domestic sales in 2019. Furthermore, it is less than half the 10 per cent penalty possible under Chinese law. By international standards, it is not a record breaker either. In 2018, the EU imposed a $5bn fine against Google.
But the full repercussions are not yet clear. Regulators have voiced concerns around Alibaba’s non-core businesses. Divestments cannot be ruled out. Previous acquisitions are still being scrutinised too. In order to remain in Beijing’s good books, Alibaba will have to boost spending on corporate good deeds and services that support small businesses in rural regions, such as Taobao Deals. Profit growth, already slowing, will fall back.
Alibaba shares trade at 20 times March 2022 earnings, less than a third the level of rivals such as Amazon. The valuation discount with global peers will grow as it continues to wrestle with regulators. In a statement about the fine, Alibaba said it was “full of gratitude and respect” for the government’s regulation and critical oversight. Local tech giants know that maintaining dominant positions lies in the hands of the state.
For the broader Chinese tech sector, Alibaba’s fine marks a new era of expensive supervision. Tencent and Baidu, the country’s dominant social media and search companies, are likely to be the government’s next targets. Equivalent fines would be more difficult for the pair to cover financially. Tencent’s 2019 revenues were similar to Alibaba’s but it has only half the cash and equivalents. Baidu has about a tenth.
Both Tencent and Baidu have notably dominant positions. Baidu controls more than three-quarters of the local search engine market. Tencent has almost 40 per cent of the payments market and about two-thirds of local game distribution.
Such success now comes at a cost. China’s central bank is considering a plan to set up joint ventures with local companies to oversee consumer data, which give big companies their competitive edge. Tech leaders can only suffer if Beijing continues to support small rivals.