After Months of Speculation, Regulators Drop Hammer on Jack Ma’s Business Empire

Six months after abruptly calling off fintech giant Ant Group’s IPO and launching an investigation into Alibaba for antitrust violations, Chinese regulators have at last announced their penalties against the two affiliated companies. Over the weekend, the State Administration of Market Regulation (SAMR) announced a record 18.2 billion RMB ($2.8 billion USD) fine on Alibaba for its anticompetitive “two choose one” policy. But as the Wall Street Journal’s Keith Zhai reported, the fine was lower than analysts expected, in an encouraging sign for investors:

China’s State Administration for Market Regulation said Saturday in Beijing that Alibaba punished certain merchants who sold goods both on Alibaba and on rival platforms, a practice that it dubbed “er xuan yi”—literally, “choose one out of two.”

As part of the penalty, regulators will require that Alibaba carry out a comprehensive revamp of its operations and submit a “self-examination compliance report” within the next three years, they said. The 18.2 billion yuan fine is equivalent to 4% of the company’s domestic annual sales, the regulator added. Under Chinese rules, antitrust fines are capped at 10% of a company’s annual sales.

[…] The antimonopoly fine levied against Alibaba, which posted $72 billion in revenue for its most recent fiscal year that ended in March 2020, far surpassed previous Chinese regulatory penalties in absolute terms. In 2015, Qualcomm Inc. paid a fine of $975 million, equal to 8% of domestic sales, after a yearlong investigation into alleged violations of China’s antimonopoly law.

[…] The new clarity on Alibaba’s future should come as a relief to some investors, said [Jeffrey Towson, a former professor at Peking University’s Guanghua School of Management]. “I think the next question is, are they going to move on from Alibaba now to another company?” [Source]

On Monday, Bloomberg News reported that Alibaba said it was unaware of any other probes into the company under China’s anti-monopoly law. Also for the Wall Street Journal, Stephanie Yang reported that the positive news sent the company’s stock surging on Monday, but that lingering uncertainty about the fate of Alibaba’s rivals remains:

Alibaba shares, which had lost about a quarter of their value since November, jumped as much as 9% in early trading on Monday morning in Hong Kong before easing slightly to stand about 6% higher, in a sign that investors welcomed the clarity over the company’s future after fines were announced.

However, the antitrust investigation outcome raised concerns among analysts about how the company would retain merchants, particularly in an increasingly competitive e-commerce landscape with rivals including Inc. and Pinduoduo Inc. [Source]

As analysts have widely expected in recent months, more sweeping penalties and required changes were imposed on Ant Group, the fintech giant spun off from Alibaba that is also part of Jack Ma’s sprawling financial empire. On Monday, it was announced that Ant would be required to undertake a major overhaul of its business, The New York Times’ Raymond Zhong reported:

As part of what both Ant and Chinese officials called a “rectification plan,” the company said on Monday that it would apply to become a financial holding company, which would bring closer supervision and requirements that it hold onto more money that it might otherwise lend or put to profitable use.

Ant said it would also “return to its payment origins.” Alipay started out nearly two decades ago as a payment service for Alibaba’s shopping platforms. But as Ant has come to offer other financial services within Alipay, the app has become a major vehicle in China for consumer credit and small-business loans as well.

[…] Beijing had been telegraphing aspects of Ant’s restructuring for months. Chinese officials first said last September that companies owning two or more financial businesses would have to register as financial holding companies and be subject to increased government oversight. In a news briefing at the time, a central bank official named Ant as one of several companies that were likely to have to restructure under the new rules.

[…] Technology “cannot become an excuse for platform companies to go beyond legal, ethical and other bottom lines,” the article said. “Financial technology has not changed the riskiness of finance; at bottom, it is still finance. Financial business must be licensed to operate, and financial activity must be completely brought under financial regulation.” [Source]

Swirling intrigue about the fate of Jack Ma’s financial empire has lingered for over half a year now, after the outspoken billionaire went silent after delivering an incendiary speech in October that was shortly followed by the eleventh hour cancellation of Ant’s IPO.

There is also seemingly public support for penalties on Ma’s businesses. On Chinese social media, young people have criticized Ant’s liberal micro-lending and Ma’s unabashed support for the brutal “996” work culture. In a further sign that the crackdown on Ant and Alibaba is more than about just business, on Friday, The Financial Times reported that an elite business academy founded by Jack Ma has been forced to suspend new student enrollments, in the strongest indication that authorities are looking beyond Ma’s businesses to examine his other areas of influence:

Hupan University, an executive training programme that is reputedly as hard to get into as Harvard, has suspended a first-year class that was set to begin at the end of March, according to people close to the institution. It was unclear when new students would be able to enrol, they added.

[…] “The government thinks Hupan has the potential to organise China’s top entrepreneurs to work towards a common goal set by Jack Ma instead of the Communist party,” said a person close to the school. “That cannot be allowed.”

[…] Some high-ranking officials in Beijing have begun to view the school as a modern-day version of the Donglin Academy, one person said. The private academy was a powerful 17th century debating ground that spawned like-minded thinkers who eventually influenced politics and weakened the Ming Dynasty government. [Source]

In the business world, the penalties on Ant and Alibaba have much broader implications for China’s tech industry, paving the way for possible regulatory crackdowns on other giants such as Tencent or JD. Regulators have already signaled interest in Tencent, imposing a token fine on the company for past acquisitions and investments in March. South China Morning Post’s Zhou Xin, Josh Ye, and Jane Zhang analyzed the implications of the Alibaba fine for China’s technology giants:

This was a milestone that “offers a reference for the future, as China has never had a case on how to define abuses [of a] dominant market position from the antitrust perspective,” said Zhai Wei, executive director of the Competition Law Research Centre at East China University of Political Science and Law in Shanghai.

[…] Alibaba’s antitrust case may set the example, prompting other Chinese internet companies to conduct self-checks on their own businesses, said the Singapore Management University’s associate professor of law Henry Gao. In so doing, the government “will be able to achieve more impact with fewer costs” than going after the Big Tech one by one, he said.

“There have been warning signs, like last year’s Central Economic Work Conference, which listed the enhanced enforcement of antitrust laws on platform enterprises as a priority,” Gao said. “If any of the [other] giants get into some high-profile scandal, they could also become the next target.” [Source]


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