Taipei, Taiwan – Alibaba has not had the best 14 months. Ever since China’s regulators abruptly nixed the initial public offering of its financial technology subsidiary Ant Group, the Chinese tech giant has struggled.
Amid those regulatory travails, a slowing Chinese economy and rising competition, its market capitalization has fallen to $358bn from $846bn on the eve of the Ant IPO in October 2020.
With such a difficult environment persisting into the New Year, Alibaba, which has been described as China’s answer to Amazon, faces a potentially challenging 2022 – although analysts count the firm’s deep pockets and ability to adapt to the vast Chinese market in its favour.
The Ant deal, slated for dual listings in Shanghai and Hong Kong, was supposed to raise $34bn. That would have made it the biggest IPO of all time.
Instead, the deal is on ice indefinitely as Ant works to meet a slew of new regulatory requirements under Beijing’s crackdown on Big Tech, which aims to curb the market power of tech giants, boost consumer protection and reassert the ruling Communist Party’s role in China’s private economy.
Under the rule of Xi Jinping, China’s most powerful leader since Chairman Mao Zedong, Beijing has humbled tech juggernauts that once seemed unassailable.
Indeed, so confident was Alibaba founder Jack Ma in his company’s position that he criticised China’s financial regulators to their faces in a now-infamous October 2020 speech in Shanghai, telling them “the game in the future is about innovation, not just regulatory skills”.
“Ma’s Shanghai speech aside, because of its size and wealth, Alibaba became the poster boy for the government crackdown,” Daniel Tu, founder and managing director of Hong Kong-based wealth management advisory Active Creation Capital, told Al Jazeera. “The company and other large Chinese tech platforms, in essence, became a threat to the government’s authority.”
While Alibaba paid a record $2.8bn antitrust fine in September after regulators found it had abused its market position, the amount was small for a company that earns revenue of more than $100bn a year. Required changes to its business model will have more far-reaching consequences. Restructuring will reduce the profitability of Ant Group’s once-lucrative lending business and curb its formidable data harvesting capabilities.
“The rising regulations in China signal the end of an era of so-called ‘wild growth’ of Chinese tech companies,” Winston Ma, managing partner and co-founder of venture capital firm CloudTree Ventures, told Al Jazeera. “The new regulatory framework means more scrutiny and potential changes to the business models of China’s internet giants.”
In December, Alibaba unveiled a restructuring plan that will split its core e-commerce business into separate global and domestic units.
“Through the reorganization, Alibaba will be able to more clearly identify domestic demand to efficiently grow sales in China via its China Digital Business Unit while expanding e-commerce and logistics businesses overseas via the Overseas Digital Business Unit,” Yannie Liao, an industry analyst at the semi-governmental Marketing & Consulting Institute (MIC) in Taipei, told Al Jazeera.
Thanks to the success of its flagship e-commerce platforms, Taobao and TMall, Alibaba has long been China’s largest online commerce marketplace.
However, its share of China’s e-commerce market steadily fell from 78 percent in 2015 to an estimated 51 percent in 2021 according to research firm eMarketer. Most of that decline occurred prior to China’s Big Tech crackdown, reflecting intensifying competition and changing consumer habits. Alibaba’s e-commerce business relies primarily on search, which is less popular with younger Chinese shoppers than live streaming or other interactive ways of shopping.
At the same time, China’s economy is slowing and consumer habits are mirroring that change. The profligate spending that defined China’s go-go years of the late 2000s and early 2010s is winding down. Deutsche Bank estimates the Chinese economy will grow just 5 percent this year, compared with 8.1 percent in 2021.
Outlook for Southeast Asia
“In the face of many uncertainties caused by the pandemic’s impact, the consumption outlook of young consumers [those born since 1990] is becoming more rational,” Cheng Shi, chief economist at ICBC International Securities, wrote in a commentary published by Chinese media outlet Yicai in September. “We believe that this will continue even after the pandemic ends.”
The outlook for emerging Southeast Asia is rosier. The internet economies of countries like Indonesia, the Philippines and Vietnam are relatively nascent, similar to China’s circa 2010, inspiring Alibaba to aggressively expand in the region through its Singapore-headquartered e-commerce platform Lazada. Lazada’s annual active consumers rose 80 percent to 130 million in the 18 months to September 2021, Alibaba said at an investor presentation at the end of last year.
At present, Alibaba remains the largest e-commerce retailer in China and the second-largest Chinese internet company by market capitalization after gaming giant Tencent. Alibaba’s deep pockets are paramount to its future prospects, analysts say.
With regards to China’s Big Tech crackdown, “the government needs private companies to restructure to adapt to the latest requirements,” Herbert Yum, a research manager at Euromonitor in Hong Kong, told Al Jazeera. “As long as they are financially healthy, they can adapt their businesses successfully.”
Yum noted that Alibaba’s cash flow remains stable, despite the many headwinds the company faces. Net income growth fell sharply in its 2021 fiscal year, but still managed to expand 4 percent to reach $20.9bn. In the previous pre-crackdown fiscal year, Alibaba’s net income grew almost 68 percent to reach $20.2bn.
Such breakneck growth is unlikely to return for Alibaba, but it is not alone. All of China’s internet companies face a more difficult business environment.
Auguring well for Alibaba is an enduring ability to cater to the needs of China, the world’s largest e-commerce market. Despite the company’s international expansion efforts, China remains the priority.
“Alibaba is still focused on China because it is the [company’s] largest source of revenue and still offers huge market potential,” said Euromonitor’s Yum.
Data and analytics firm GlobalData predicts that China’s e-commerce market will grow at an annual clip of 11.6 percent between 2021 and 2025 to reach $3.3 trillion.
Cloud computing, meanwhile, offers Alibaba additional growth opportunities. In the 2021 fiscal year, the company’s Alibaba Cloud unit reported $9.18bn in revenue, up 50 percent year-on-year. MIC’s Liao noted that Alibaba’s cloud computing revenue has expanded on a quarterly basis since the first quarter of 2020.
However, regulatory obstacles exist in cloud computing too. Active Creation Capital’s Tu noted that, ahead of the implementation of a national data security law, Beijing in August ordered state-owned enterprises to speed up the migration of their data from private operators such as Alibaba and Tencent to government cloud infrastructure.
The loss of business will be substantial, though Alibaba can still work with the private sector. China’s public cloud service market was worth $19.4bn in 2020, according to research firm International Data Corporation.
“In the context of the ongoing crackdown and reforms, it would behove Alibaba to pivot and focus in the areas that sync with national initiatives – ‘hard technologies’ such as semiconductors, artificial intelligence and quantum computing,” Tu said.