Insights, The Bridge
Jason Hsu, Ph.D.Scroll down
Beijing’s recent crackdown on consumer tech has global investors hypothesizing the worst. Some have concluded that Beijing is looking to punish financial success either out of petty jealousy or ideology. Others believe China is moving away from capitalism and a market-based economy back towards central planning. Some even suggest that Chinese regulators operate with a mandate to exploit or even harm international investors.
I certainly don’t doubt ranking politicians may be petty enough to remind China’s outspoken and larger-than-life billionaires “who is really in charge.” And understandably, when the leader of a communist country utters the words “common prosperity,” the Western world hears “death to capitalism.” And on the surface, Chinese regulatory concerns about data security and monopoly power do seem suspiciously targeted toward U.S. listed Chinese firms like DiDi and Baba.
But I think these issues are tertiary and distracting. There is something more fundamental at play when it comes to the Chinese consumer tech giants. Failing to grasp the core reason these companies are too big to succeed will lead investors to draw incorrect inferences from the recent regulatory crackdowns.
For global investors, the million-dollar question remains: Is BaBa a screaming value buy or a flaming value trap? To answer this question, we need deeper insights into Beijing’s views on 1) fair margin for tech monopolies, 2) the ownership of valuable consumer data, and 3) tech giants’ power and influence in shaping China.
The Chinese consumer tech giants, similar to their American counterparts—the FAANG—have more than the proverbial “moats” around their businesses. These tech platforms, with hundreds of millions of users, millions of contract employees and hundreds of thousands of vendor merchants, control vast ecosystems which dominate China’s e-commerce.
Increasingly, within these ecosystems, vendors and contract workers are powerless price takers; consumers are similarly trapped as alternatives are crushed or consolidated. These consumer tech giants enjoy enviable margin expansion on the back of monopolistic power, afforded by the increasing return to scale and network effect unique to big data driven e-commerce platforms.
Without a doubt, Baba, DiDi, Tencent and Meituan wield monopoly market power given their size. But they have power far beyond that, which might be the more serious concern to Beijing and its regulators. Controlling an e-commerce ecosystem is more than the power to dictate terms of trade. These platforms also influence substantially technology adoption, commerce and user community within their ecosystems.
In many ways, within their e-domain, the Jack Ma’s of China set the rules and pick the winners. They are kings and king makers. This power is possible because they control the data.
Consumers voluntarily (though sometimes unknowingly) give giant consumer techs the data that allows these companies to predict and even manipulate consumer behavior. Predictive behavioral models, driven by big data, give product vendors a mind-reader’s ability to target, hook, persuade and win; occasionally, when needed, out-right addiction can be engineered in the consumers. User profile and behavior data are the key to unlocking value on these consumer tech platforms; everything else is just a commodity. The astronomical valuations paid by global investors for consumer techs is an indication of the value extraction possible for the company that controls these databases.
Western investors have long understood the value and power of that data; and they have been more than willing to pay a king’s ransom to own them. This is largely why Chinese consumer techs have chosen to unlock founders’ liquidity by listing almost exclusively in the United States. However, Chinese regulators have realized this only recently.
Beijing became aware of the power and value of big data primarily while investigating complaints of anti-competitive monopolistic business practices of these tech giants. But unsurprisingly, they quickly became paranoid about data ownership.
Tencent, BaBa and DiDi are listed offshore, substantially owned by global investors, and hold behavioral profile data on a few hundred million Chinese consumers – is this data now owned by foreigners? Could the controlling shareholder of these firms examine conversations on WeChat or specific payment transactions thru Alipay or the whereabouts of riders of interest? Could that data be sold to foreign governments?
Yes, there is absolutely hypocrisy for Beijing to express concerns about consumer data privacy and protection. The irony isn’t lost on me. However, Beijing is absolutely rational and self-interested in wanting to ensure it is the only entity with unfettered access to that data. This goes beyond the straightforward concern of sensitive information being misused and abused. At the core of this issue is the Party’s discomfort for the enormous power wielded by the owner of data about hundreds of millions of Chinese citizens.
Make no mistake about it, the CCP isn’t interested in sharing power with tech CEOs as kings and kingmakers. On top of all that, there is the simple issue of anti-competitive monopolistic market power—a concern the West and its market economists can and should understand as rationale for regulatory crackdowns. Regardless, in light of Beijing’s new-found knowledge about its biggest tech firms and what makes them so powerful and valuable—what was once interpreted by investors as too big to fail may have now become too big to succeed.
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