In an ambitious and far reaching move, China is signaling a new approach to Big Tech.
And by extension, entrepreneurship and innovation will blossom.
Split six ways, you might say — crystallized in the carving up of Alibaba.
Or maybe not.
The news that Alibaba is, in effect, restructuring and opening the door to public listings might be cheered by Wall Street — the stock is up roughly 18% from just before the announcement.
The cheering is predicated on the fact that IPOs — and new access to capital — herald the fact that China realizes the sector is integral to goosing economic growth. And, of course, there’s the lure of buying the as-yet-to-be-available shares, and sharing in the profits. Though it’s no sure bet that investors here, should there be U.S. listings, will snap up shares, given the adversarial relationship between the U.S. and China.
The reality may prove to be less a sea change than some might hope.
As widely reported this week, Alibaba — a marquee name in China’s tech sector that has been through twists and turns and regulatory crackdowns — said that it will become a holding company. And as it does so, it will split its far-reaching operations into six separate units. The units will be cleaved according to focal points such as cloud, media and logistics. As for eCommerce, Alibaba is effectively keeping those operations close at hand, as Taobao Tmall Commerce Group will remain wholly owned.
Of critical importance, as signaling the change that’s afoot, CEO Daniel Zhang wrote in the announcement of the split that the opportunity will be there for the units to pursue “independent fundraising” and IPOs.
The announcement is a read-across, we contend, for an about-face within China’s tech kingdom. Recall that just a few years ago, Chinese regulators blocked a much-anticipated IPO of Ant Group. The proposed dual listing, in Hong Kong and Shanghai, had it gone through, would have been one of the biggest listings in history.
There’s no word yet, as to where, or when, the units might list. But by conducting initial offerings, and essentially, giving the go-ahead for further capital raises, it’s likely that China’s government wants to give a tailwind to innovation, and also to gain some standing within the investment community.
The moves — the restructuring, the teasing of potential listings, and even Jack Ma’s public appearance — come at a time when China’s standing, especially in the U.S., has been a bit fraught.
Among some recent examples, Alibaba and Tencent have been part of the U.S. government’s Notorious Markets for Counterfeiting and Piracy roster. As spotlighted here, TikTok is under fire, and there are discussions on Capitol Hill and elsewhere about bans.
In the payments arena, Alipay still holds sway as the largest payments platform. And retailers have a significant interest in Chinese consumers’ willingness to keep spending. Starbucks, McDonald’s and Apple are among them, of course. As Apple CEO Tim Cook said earlier this month, the tech giant has a “symbiotic” relationship with China. Though Apple is reportedly looking to shift at least some of its production away from China, the fact remains that the company also gets about 20% of its net sales from the greater China region, per its latest quarterly report.
China has seen economic growth slow in the wake of the pandemic and is targeting 5% growth in the current year (the slowest rate in decades). Geopolitical tensions run high (President Xi Jinping has met with Russia’s Vladimir Putin in the midst of the war in Ukraine and is a key trading partner for Russia). Among the most effective ways for China to put a tailwind under economic growth may be to let its tech behemoths run a bit freer, to expand the conduits through which those firms can grow. Innovation is rewarded in the public markets, when it translates into revenue (and, investors hope, profit) growth over time.
Letting Alibaba essentially transform itself on the world stage may be a harbinger of things to come.
Maybe. And then again, maybe not. There are plenty of signs that China’s restrictions that have put guardrails around Big Tech may be engineered in other ways beyond the crackdowns of years past.
Chopping Alibaba into pieces, in effect, with siloed operations, rids regulators of concerns about market data dominance. The smaller the firm the less power it has in its respective market, in terms of pricing power. Restructuring a corporate juggernaut takes time and effort and costs money, which in turn leaves flanks vulnerable to competitors. Given the reemergence of Ma, it’s fair to speculate that Alibaba’s corporate revamp has come at the “suggestion” of regulators behind the scenes.
And if that’s the case, if the de facto lesson learned from Alibaba is that there’s a tipping point where firms become “too big to scale,” and thus get carved up, then the landscape of innovation, and funding that innovation, becomes drastically altered. The incentive to make the capital investments that translate into R&D and innovations (and market share) wind up being hobbled, at least a bit. China’s dominance on the tech stage has receded a bit as so much has happened on the regulatory front.
The Alibaba dissection leads to at least some consideration of the same thing happening to other conglomerates, with the government directing the scalpel behind the scenes. And perhaps Alibaba’s huge announcement may wind up signaling that some things will stay status quo after all.
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