How China Lost Patience with Its Loudest Billionaire

I never worry about regulations. Why not? Because I know I'm a good boy. I have interviewed Jack Ma at least four times in the last 25 or 30 years. In 2005, Alibaba was still in its infancy, I asked him how he stays ahead of regulators and he said... The government loves me because I'm helping them build businesses. He had that chutzpah in 2005. So that chutzpah has now come back and kind of bit the showman in the butt. More than two decades ago, Jack Ma co-founded Alibaba. Today it is China's e-commerce giant and one of the largest companies in the world.

But recently, Ma and his tech empire have been in trouble. In April, Alibaba was fined a record $2.8 billion for monopolistic conduct. Its subsidiary Ant Group, in which Ma has a majority stake, was ordered to reform its business after the abrupt suspension of its initial public offering in November 2020. This seemed like a fairytale listing for Ant Group, but now There has been a significant shift. . And since then, Mom has kept a low profile. Just being quiet is a very notable thing, which we think of when we think of Jack, we think of him as very loud and brash.

And that's why we're all a little surprised when he doesn't speak. But Alibaba and Ant are not the only technology companies in the crosshairs of Chinese regulators. I think this is a watershed moment for China's tech industry. Some would say that the golden days of China's Internet era are virtually over. So what does the future hold for China's tech giants? It has become the stuff of legend. In 1995, during a trip to the United States, then-English teacher Jack Ma had his first encounter with the Internet at a friend's house in Seattle. I searched for the first word, beer.

I do not know why. Because maybe it's easy to spell. And I see beers from Germany, beers from the United States, beers from Japan, but there is no beer from China. Back home, he founded China Pages, a website similar to the Yellow Pages, but it didn't take off. By 1999, the Internet stock boom had taken over Wall Street. And back at his Hangzhou apartment, Ma decided to try again. With his wife and a small group of friends, Ma created Alibaba, a site that allowed companies to sell things to each other. That same year, a newly created company, Tencent, launched its first product, OICQ, an Internet messaging service.

Alibaba arrived. Tencent has arrived. They grew in certain areas, such as gaming. Alibaba grew in e-commerce. But then their services began to multiply more and more. Alibaba and its subsidiary Ant, along with Tencent, are the two pillars of China's Internet industry. You can think of their influence in terms of the products they offer. Let's think then about the most powerful mobile Internet applications in the United States and Tencent would be a combination of all of them. Tencent's WeChat, for example, which is just one of its main services, is a combination of WhatsApp combined with services from Uber, Spotify, Snapchat, there are also elements of TikTok and financial payment services like PayPal.

Alibaba is best known for being an e-commerce giant, but the company has expanded far beyond its core business. It has businesses in sectors such as logistics, entertainment. Think about America's biggest blockbusters. "Mission: Impossible" was financed by Alibaba Pictures. So it is a very powerful conglomerate. Tencent and Alibaba apps are used by one billion people combined. Each company has a market capitalization of more than half a trillion US dollars and they have invested billions in Chinese technology startups. Startups have to deal with duopoly and often have to take money from one of the two sides. And it's almost like an offer you can't refuse.

Not taking money from them can be harmful. And if Alibaba or Tencent decide to invest in their competitor, the consequences can be quite dire. Apart from that, when it comes to services, e-commerce players often complain that they have to choose between e-commerce platforms. It could be Alibaba or its rivals. For more than a decade, the Chinese government allowed the Internet sector to grow with little oversight, as it was not yet considered an essential industry. Beijing also hoped that the expansion of these companies could stimulate China's economy. Using the model of combining American capital with the best entrepreneurs and also the intellectual capacity of China, the Internet sector or the technological sector of China simply grew into this giant that overnight, when the government realized He realized that it had gotten so big, it was already out of his control. some would say.

Their ability to accumulate large amounts of data and combine it with artificial intelligence gives them key information on 1.4 billion people and also on key industries and economies in the country, which is really something that is at the heart of the ruling party's concern. . If these companies venture beyond the limit of control, there is a risk they pose to the ruling Communist Party. And power is at the center of everything and the priority of the ruling party. China stopping the world's largest IPO. Ant Group's trading has been suspended in both Shanghai and Hong Kong. And this is truly a surprising turn of events.

It was the most anticipated IPO ever recorded and money was piling up to invest in it. So, just in that essence, it was a dramatic change on the part of the regulators because they had already received the go-ahead from the securities regulators and at the last minute it was withdrawn. It was going to be a $30 billion-plus IPO, but it all fell apart after this speech, of course, in Shanghai by Jack Ma, where he criticized the regulatory environment. He criticized state banks for operating like pawn shops. And he didn't read the room very well, because the audience at the Shanghai Bund conference was full of government officials.

He didn't like this. The Ant IPO debacle is the turning point. And obviously the underlying political tensions have been there for a long time. So in the last 10 years a lot of tension had been building up. Only until this very intelligent event did the whole balance tip. Ant is China's largest fintech company, created in 2004 as a payment service to facilitate transactions with Alibaba. The company has expanded its business into wealth management, credit lending and insurance. In the year to June 2020, it managed to process payments worth $17 trillion. And at one time it had the largest money market fund in the world.

In recent years there have been many complaints from state lenders about how Ant is encroaching on their territory, especially in lending and also wealth management. And banks are subject to a different set of rules that are much stricter, while Ant has been able to circumvent many of these strict rules by playing the role of fintech disruptor. And they added microcredits. And I say microloans are just a name for the prolific, mega, many, many different small loans given to buyers on Alibaba's different platforms. That posed significant risks because Alibaba only funded about 2% of those loans, and the rest of those loans were securitized by state banks.

They took the big risks. Just the day before Ant's IPO was suspended, regulators released strict draft rules for online microlenders that would require Ant to provide at least 30% of the financing for the loans it underwrites for banks and others. financial institutions. That night, regulators summoned Jack Ma for a meeting. What we learned was that while they didn't discuss the details of the IPO, the message was clear: the free days of Ant's business were coming to an end and things were about to change. That was probably the first indication that things weren't going to go as planned.

But the writing on the wall was already there in the previous months. There were a number of rules already being implemented since September that put a brake on Ant's lending business. After the suspension of Ant's IPO, the company was ordered to reform its business, turning it into a financial holding company with regulations similar to those of a bank. Regulators also launched an antitrust investigation into Alibaba. Furthermore, there is also said to be scrutiny over Jack Ma's growing media empire. He owns the South China Morning Post in Hong Kong. He owns at least 30% of the social media platform Weibo, which is like China's Twitter.

He also has another media outlet, Yicai, which is a very large media company that has an online presence in China. Regulators are said to be closely watching the influence Jack Ma and Alibaba have on Chinese society through those stakes in media companies. Some would say it's the Chinese government that likes to have the final say on what information the public receives. Since the collapse of Ant's IPO, Ma, the face of China's new economy and the showman who always takes center stage, has disappeared. Jack, are you there? Jacob? There doesn't seem to be anyone inside. It may not appear, but it is not missing.

He has not been captured. They haven't taken it. Like many entrepreneurs in China, Ma had been walking a tightrope, balancing the sometimes contradictory demands of Beijing and foreign investors who are eager to see growth. For many years, Jack Ma branded himself or tried to create this image that he was a rebel, that he was rebelling against the system and that he was a troublemaker fighting for the little guys. In love with the government, but don't marry them. I mean, this is... he is also extremely intelligent, always appealing to the common good, trying to convince the government why his company and the services he provides are good for job creation in China and also for the image from China.

It wasn't until earlier this year, 2021, that Jack Ma reappeared. He was talking about philanthropy and the tone in which he delivered his speech was much more modest and humble compared to his October speech. He was doing something the government wants a man worth $54 billion to do. And that is talking about poverty alleviation and strengthening and investing in rural China. These are messages that the Chinese Communist Party likes. You know, 10 years ago, I mean, it was a very different government, or 15 years ago, very different back then. You had much more laissez faire towards technology. There were also ineffective or often overlapping regulations, sometimes with loopholes.

And I think Jack assiduously exploited some of them. In contrast to today, we see much less tolerance for regulatory problems. China's government has really upped its game. You can no longer simply attack the government as he did. So maybe Jack just didn't realize the game had changed. Just five months after the sudden collapse of Ant's initial public offering, regulators slapped Alibaba with a record fine for monopolistic conduct. Ant is now under review. Is the Chinese government trying to limit Jack Ma? They don't want to limit the national champions, okay? But they probably want to lower Jack Ma's public profile a bit.

So I don't think Alibaba is going to change radically. Its core will continue to be electronic commerce. But I think for Ant, yes, it's very different. What can Ant be without this lucrative data and lending business? That's a great question. The Chinese government has also launched an investigation into alleged monopolistic practices by food delivery giant Meituan. 32 other technology companies, including Tencent and Bytedance, which owns TikTok, have been ordered to rectify anti-competitive behavior. I think regulatory uncertainty will be in the backdrop of almost every big tech story for the foreseeable future in China. From the government's point of view, I mean, they don't care about tech companies becoming smaller and weaker.

It's just a different direction that the government wants these companies to go in. Antitrust regulation will give smaller companies the opportunity and room to grow, which is important. The trend in which governments try to control technology companies and end monopolistic practices is global. I think the difference in China is that technology companies do not have the power to defend themselves. When the government cracks down on them, ironically, what we saw with Alibaba is that they thanked the government. And that's something that I don't think Google or Facebook are doing in the United States right now. At the end of the day, the Chinese government has the final say, and it kneels or breaks.