Alibaba vs The Chinese Regulators. First Warning…

Chinese tech giant Alibaba has been served with a $2.8 billion (£2billion) fine imposed by the country’s anti-monopoly regulator. China’s State Administration for Market Regulation (SAMR) enforced the measure after it was claimed that Alibaba had been abusing its dominant market position for years.                     

The penalty is the latest in a chain of events targeting the company that kicked off last October, after Alibaba’s co-founder Jack Ma criticised regulators, suggesting they were stifling innovation.                      

Alibaba has often been seen as the ‘grandfather’ of China’s tech industry. It dominates the marketplace there with over 800 million users in China alone. As will be seen, many believe the penalty served on Alibaba will be a wake-up call for others in the Chinese tech sector.

So, what exactly has Alibaba done wrong?

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The regulators have been concerned with Alibaba’s running of its e-commerce platform. Alibaba had restricted sellers from doing business or running promotions on rival platforms. In fact, the e-commerce giant has, since 2015, forced retailers to sell exclusively on its Tmall and Taobao online shopping platforms.    

This obviously raises some important competition law issues. Large marketplaces like Alibaba are often the only means for businesses to trade. Being the influential corporation it is, Alibaba will need to start creating a more open market if it is to be accepted by the Chinese regulators and the public at large. 

A slap on the wrist?

Alibaba has responded to the fine by promising that it will introduce measures to lower the barriers to entry and business costs faced by merchants on the e-commerce platforms. However, the company does not expect any material impact on its business from the change of exclusivity arrangements (agreements which will re-define the exclusive relationship between Alibaba and the seller) imposed by the regulators. 

It is also worth mentioning that the seemingly almighty, multi-billion dollar fine only constitutes 4% of Alibaba’s 2019 revenue. Although it is a record fine, for Alibaba, it is merely a drop in the ocean. For a company with a net worth of over $660 billion in April 2021, the penalty is a slap on the wrist.     

However, although Alibaba is not presently aware of any further anti-monopoly investigations by Chinese regulators, they believe that they (and their competitors) would remain under review in China over mergers and acquisitions. In fact, Alibaba Group’s executive vice-chairman Joe Tsai believes that regulators have taken an interest in platforms like Alibaba as they grow in importance. Alibaba says that, although they may be one of the first biggest Chinese tech firms to attract the regulator’s attention – they are by no means the last. 

So, maybe in the coming years, the regulators will have a more significant role to play…

An astonishing rebound? Maybe not…

What is surprising is that after the $2.8 billion fine was announced, Alibaba’s share price actually rocketed by more than 8%. This was because investors believed that the fine signified the end of the investigations by the regulators.   

Whilst this may be all well and good for Alibaba, what has been seen is the growing force of the regulators. It, therefore, appears almost inevitable, due to the market dominance of the company, that the regulators will come back again. Because of this, the share price boom may very well be short-lived if the company cannot adapt quickly enough by putting fairer regimes in place. 

The political element:

Alibaba may well have to get used to the regulators looking over their shoulders. The seemingly tightening grip of the regulators may be down to the Chinese Government.  

Unlike the well-known equivalents of Amazon and eBay in the western world, Alibaba operates in communist China. The strongly held belief of President Xi Jinping is that nothing (including Alibaba) can be bigger or more powerful in the lives of Chinese people than the Communist Party. Companies such as Alibaba create an alternative virtual world for Chinese people. However, this influence puts Alibaba in direct competition with the Chinese Communist Party.    

This might not be something that Alibaba can ever evade, and it will be likely that they will simply have to buckle down and comply with the watchful eye of the regulators. 

With that being said, Chinese regulators have not always been tough on tech companies. In fact, most Chinese tech firms traded in an environment with little or no regulation. The Chinese Government once promoted the creation of a regulation-free ‘heaven’ for these companies to grow in. However, China is now trying to rein in these firms.

Although it certainly will not want to destroy the Alibaba empire, the Chinese Government intends to use its levy on the giant to frighten off like-minded tech companies. In fact, these stricter regulations may enable smaller innovative tech companies to flourish.

Could these new rules help to level the playing field?

What about the Ant Group subsidiary?

In early April 2021, Alibaba’s affiliate and digital payments firm, Ant Group, announced a drastic restructuring plan. Ant Group will restructure as a financial holding company, a move expected to hinder its profitability and valuation. 

The central bank of China has asked Ant to stop monopolising information and comply with the necessary credit information regulations. Ant has agreed to improve corporate governance and rectify illegal financial activities in credit, insurance, and wealth management.

Overall, Ant Group will be subject to tougher regulatory oversight. It will also be required to cut its links between its hugely popular payments app, Alipay, and its other businesses – which had been viewed as a big advantage due to Alipay’s vast pool of customer data. The Ant Group restructure effectively splits the corporation into a few independent businesses in an attempt to stop Alipay from being a super app capable of controlling the day-to-day lives of the Chinese people. What may once have appeared to be a rule less ‘heaven’ for tech companies is now starting to fall in line with the other worldwide financial hubs. You could say that the big dogs of the industry are being held back to enable a fairer market to flourish. Many believe that the actions against Ant Group will hinder its growth prospects and also open up the market for competition. 

So, what now for Alibaba?

Alibaba has reassured investors that they are playing ball with the regulators. The company is going to make it cheaper for businesses to sell on their platform, and not force them to pick and choose between providers. They will allow their business users more freedom this way. Alibaba says that the discussions with regulators have so far been amicable.  

From a competition law perspective, Alibaba’s fine marks the Chinese attempts to apply regulations in one of the fastest-growing industries in the world. The sprawling Chinese tech sector, especially considering it once was the home of loose regulation, has arguably matured as it seeks to rein in those that are expanding unfairly at the expense of others.

In fact, Alibaba is not the only Chinese company to come under scrutiny by China’s increasingly assertive regulators. Last month, the SAMR in China said that it had fined 12 companies over 10 deals that violated anti-monopoly rules. These companies included Tencent, Baidu, and Didi Chuxing – which are among China’s largest tech companies.  

Chinese tech firms are a powerful force in the country, and Beijing is keen to regulate them. Whatever happens next, Alibaba’s experience is likely to be a sign of more to come…

This article was written by Tom Bailey. Tom is a final year LLB law student at the University of Law in Guildford, and a Content Writer for According To A Law Student (ATALS). Tom is keen to pursue a career as a Solicitor, having a specific interest in property law.   

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