Tag Archives: e-commerce

Sometimes Business Is Just Business

Screenshot of Amazon home page

THERE IS HARDLY an aspect of business these days that does not trip over the deteriorating relations between Washington and Beijing.

Take fake and paid-for customer reviews on the US e-commerce platform Amazon. The US company has been waging war on these for years but since May has removed some 50,000 Chinese e-retailers from its marketplace, citing their attempts to solicit them.

The moves have cost the merchants an estimated $15 billion in lost sales. One of the largest companies affected, Shenzhen Youkeshu Technologies, which has 340 Amazon stores, said the US company was also holding onto $20 million of its funds and inventory.

The instinctive response from China has been that it must be the US government that is behind Amazon’s actions, a response reinforced by Amazon this time not restoring banned stores after the payment of a fine and a promise of future good behaviour.

Thus some of the companies are turning to Beijing for help. Last week, Li Xingqian, a senior official in the Ministry of Commerce, acknowledged Amazon’s decision and said that China would protect its companies ‘legitimate rights and interests.

Cross-border e-commerce has grown into a $260 billion industry for Chinese firms, boosted by the Covid-19 pandemic. Fake and paid-for reviews are common in domestic e-commerce, but this ‘Chinese solution’, as Li euphemistically called it, does not play well in current unfavourable climate in the United States towards Big Tech.

Quite how Beijing can come to its e-tailers’ aid is far from clear, given its current issues with the tech sector’s alleged abuses towards consumers.

Chinese firms could adopt an ‘American solution’ — lawsuits. However, plans by a group of some 20 mid-sized and large companies operating in the ‘made in China, sold on Amazon’ market to file a joint lawsuit against the US company broke down last week after the sellers could not agree on the end goal of any lawsuit. Further, Amazon’s terms and conditions for participating in its marketplace ban merchants from taking class-action suits against it.

In the current febrile atmosphere surrounding US-China relations, it is always easiest to suspect political machinations, but sometimes business is just business.

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Alibaba Antitrust Fine Is As Instructive As Punitive

Screenshot of Alibaba website

THE ANTITRUST FINE on Alibaba is hefty — a record in yuan terms –but not as punitive as it could have been.

The 18.2 billion yuan ($2.8 billion) that the e-commerce giant will have to pay for abusing its market dominance tops the $975 million imposed on the US chipmaker Qualcomm in 2015 but is equivalent to only 4% of Alibaba’s revenues. Qualcomm’s was 8%, and the maximum penalty authorities can impose is 10%. Further, the State Administration for Market Regulation (SAMR) took a narrow view of Alibaba’s revenue, counting just those from its e-commerce businesses.

None the less, this amounts to more than just a slap on the wrist. It also reinforces a message that has been repeatedly sent for several months.

Authorities are reining in the power of the tech platform giants, among whom Alibaba and its sprawling empire of associated businesses is the poster child. They thrived in a sector that never had the moderating influence of large state-owned enterprises. Alibaba was disingenuous when it said in its post-fine letter of contrition:

Alibaba would not have achieved our growth without sound government regulation and service, and the critical oversight, tolerance and support from all of our constituencies have been crucial to our development.

It and its main rival Tencent grew massive because of the absence of state guidance. Party leadership is being plain that the Party calls the shots, no matter how large the tech platforms’ social and economic influence grows. The da y’s of light regulation are over. The tech sector will become subject to the same level of regulatory oversight as any other.

Attacking Alibaba and its main rivals on antitrust grounds – the specific charge against Alibaba is that it restricted competition by forcing vendors on its Tmall and Taobao online shopping platforms to deal exclusively with it — provides consumer-protection gloss to the actions. A dozen companies were fined last month for antitrust violations, including Tencent and Baidu (the other two of the ‘big three’ Chinese internet giants) and the ride-hailing app Didi Chuxing.

Financial regulators are also concerned that the rapid expansion of fintech — services such as AliPay — beyond payments systems is creating new avenues of unregulated shadow banking that will add to the overall leverage within the economy that already greatly concerns authorities. Preventing what is termed ‘disorderly expansion of capital’ is now policy. Regulators forcing Alibaba’s spun-off fintech, Ant Group, to pull its proposed blockbuster $37 billion initial public offering last November was another indication of that.

Jack Ma, Alibaba’s founder and China’s most prominent and outspoken tech billionaire inside and outside the country, has been particularly in authorities’ crosshairs. Last week, his Hupan University, an elite business academy that teaches entrepreneurship, was made to suspend new enrolments. Elite educational establishments outside Party control are viewed with official distrust.

Alibaba has also been pressed into divesting its media assets. It owns video streaming and sharing sites in China and Hong Kong’s leading English-language newspaper, the South China Morning Post.

More worrying is that the crackdown may bring restrictions on its ‘secret sauce’: its ability to combine the many businesses it has diversified into, from physical retail to food delivery and cloud computing, with its core e-commerce and social platforms, thus turbo-charging its ability to cross-sell.

In November, SAMR released draft rules to prevent price-fixing, predatory pricing and unreasonable trading conditions. They also included restrictions on using data and algorithms to manipulate the market, which could curtail the platforms from data cross-subsidisation to target specific customers. That would be a wounding blow to the big platforms’ business models.

It may also bring them closer into line with national economic objectives. By making the platform companies exit non-core operations and forcing more competition in their core business, Beijing may be co-opting them to the cause of global leadership in high-tech industries. Without access to the easy money from monopolistic practices, the tech giants will instead undertake more fundamental R&D and innovation to support national technological self-sufficiency. Or at least, so the theory goes.

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Protecting China’s New Economy

IF EVER THERE was an example of the West fighting the last war, it is over whether China is a ‘market economy’ in the eyes of the European Union. European steelmakers have been on the streets of Europe to support the case that it isn’t. China, however, has moved on to protecting its new economy.

The Ministry of Industry and Information Technology in concert with the State Administration of Press, Publication, Radio, Film and Television (SARFT) has published new rules for internet content providers. These set strict new guidelines for what can be published online, and what content—and which publishers—require prior approval from authorities.

“Sino-foreign joint ventures, Sino-foreign cooperative ventures, and foreign business units shall not engage in online publishing services,” the rules say, adding that any ‘online publication service units’ need to get prior approval from SARFT if they want to cooperate on a project with any foreign company, joint venture, or individual.

All content providers will also be required to host their data on local servers and be forbidden to store it on related servers and storage devices outside China.

The initial reaction outside China has been to see this as part of the strengthening central control over the media, and the creative industries generally, in line with President Xi Jinping’s broader centralization of authority and notions of soft power. Xi has just completed an inspection tour of leading state media to reinforce the message that they are there to be an instrument of the Party.

That, in itself, is nothing new, even if the emphasis on Chinese media gaining a louder voice on the international stage and “telling China’s story well” is.  However, the bluntness with which Xi underscored that state news media must “work to protect the Party’s authority and unity” and be the government and Party’s “publicity front” has not been heard for some time. Xi’s use of the word ‘struggle’ in the press’s role particularly harkens back to earlier times.

Western news providers such as Thomson Reuters, Dow Jones, Bloomberg, the Financial Times, and the New York Times are likely targets of the new rules. But so, too, are some of the fast growing non-state media companies that have flourished online through providing entertainment. The Party now wants to bring such outlets more under its sway in the way that traditional non-party media are circumscribed.

In the same vein, further targets include foreign game companies like Sony and Microsoft, and Hollywood studios and distributors that might introduce subversive—or even just foreign—ideas into the country through films, TV shows and other works of popular art.

However, the widely overlooked significance of the new rules is that they do not just tightly constrain China as a market for foreign news outlets, publishers and entertainment companies. They apply to all providers of online content.

That could include payments and e-commerce companies. Any foreign firm, such as Apple, Amazon or Alphabet (née Google), that might challenge China’s entrenched e-commerce giants is at risk.

That fits well with the notions of online national sovereignty that Xi outlined last December during a defense of online censorship in a speech to the Global Internet Conference, a meeting of a couple of dozen countries convened by China in Wuzhen in Zhejiang province.

As ever, how Chinese authorities implement the new rules — and how selectively — will determine how restrictive they are — and who gets restricted. Chinese laws are usually vague and broad to that end, if always with laser-focused purpose.

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Will Unravelling China’s VIEs Pull The Rug Out From Under Alibaba?

IS THE LAW of unintended consequences — or intended ones — in play with the new draft revisions to China’s foreign investment law? And if the later, whose intentions need to be examined?

What may be at stake is control of three of the fastest growing sectors of the Chinese economy — the internet, e-commerce, and cloud computing. Privately owned companies, not state-owned enterprises dominate all three. More to the point, these are about the only sectors of the economy to create large privately owned Chinese companies and from which state-owned behemoths are absent.

As Steve Dickinson of the China Law Blog points out, Baidu, Sina, and Alibaba are at risk of getting their wings clipped. To be fair, that is not the wording he uses. However, this Bystander sees it as a consequence of the significant implication he does note will result from the draft foreign investment law newly published by the commerce ministry: it will end a corporate governance structure known as the Variable Interest Entity (VIE).

All three companies and hundreds of others, particularly technology and telecoms firms, use VIEs to get round the investment regulatory rigidities of sectors of the economy the government deems strategically important and so proscribes or limits foreign investors.

The new draft revisions specifically set out to end VIEs. The revisions’ other main goals are:

  • to lessen the red tape for foreign direct investors wanting to own businesses in China;
  • to switch to a system of monitoring foreign investors via annual reports from pre-approvals for new foreign investments, save for in sectors of national significance; and
  • to put Chinese companies with foreign investors under the same legal regime as domestic companies.

China’s foreign investment law is outdated, so modernisation is to be welcomed — even if the draft law runs to a weighty 179 articles across eleven chapters.

VIEs are a loophole that has let foreigners operate businesses in the country through Chinese front companies. They are a corporate sleight of hand by which an investor controls a company through contractual legal agreements rather than through share ownership.

In short, VIEs say to authorities in country A ownership resides in country A while at the same time telling investors in country B that ownership resides in country B. This Bystander doesn’t need to be a lawyer to see that doesn’t pass many smell tests for good corporate governance.

There have been a number of VIE-related scandals, including involving Alibaba, Sina.com, and New Oriental Education, as VIEs open too many creases along which any or all of regulatory, ownership and operational risk can spread.

Nevertheless, VIEs have become widely used. At first, they were a way for inward foreign investors to enter parts of the Chinese market otherwise closed to them. Increasingly they have been used by privately-owned Chinese companies that list overseas, especially those from industries in which having any foreign shareholders is forbidden or restricted, such as tech and telecoms.

They circumnavigate regulatory rigidities: the constraints on Chinese firms raising capital domestically and the need for private firms to get permission to invest overseas, and restrictions on foreign investors and firms having ownership of Chinese enterprises in certain sectors of the Chinese economy. But given those restrictions on foreign investment exist, VIEs aid and abet in breaking the spirit of the law, if not its letter.

The straightforward solution would be to remove the regulatory rigidities. However, Beijing is not going to abandon keeping sectors of the economy ‘off-limits’ to foreign investors. Its new draft foreign investment regulations use where ‘effective control’ of a company resides to determine ownership.

At a stroke of the legal drafting pen, VIEs becomes irrelevant. Any business that authorities determine to be effectively foreign controlled will be breaking the law if it operates in a restricted or prohibited industry.

All of which would leave the likes of Baidu, Sina and Alibaba and all the other internet businesses that operate as VIEs in China, in a pickle. So, too, foreign investors who bought into the initial public offerings with such gusto and who could end up holding the paper of a company that is illegal.

Now, we don’t doubt that between drafting and final promulgation of a new foreign investment law, accommodations will be made to resolve any such discomforts. While the regulators appear to have rejected lobbing from the companies to, in effect, grandfather them into legality, the draft regulations would let a VIE that is controlled by Chinese to be considered a Chinese company. That determination would be made by authorities on a case by case basis. It would be incumbent on the VIE to show it should be exempted from being put out of business like every other VIE.

Beijing has to walk a fine line if it is not to discourage the development of those industries in which Baidu, Sina and Alibaba operate. All of them could play critical roles in encouraging domestic consumption and thus help meet the government’s goal of rebalancing the economy away from infrastructure investment- and export-led growth. On the other hand, it can’t be too blatant in showing that there is one rule for the powerful and well connected and another for all the rest.

Such companies could also switch their governance to a two-share-class model, and keep the relationship between investors and owners as effectively separated as they are with a VIE. (We don’t approve of companies having A and B shares as a matter of good governance, but that is a topic for another day.)

However, the cost of that will be greater government regulation over them and possibly the promotion of state-owned enterprises to rival them, though perversely it may also give the big, established players some protection from new entrants who won’t be allowed to go the VIE route or anything that looks like it (though opening the capital account would mitigate the need to).

There are several parts of the political establishment, from the security and propaganda arms to the state-owned enterprises themselves, who would welcome reining in the big private Internet groups. Abolishing VIE’s might be intended primarily to kill a lot of flies, but, intentionally or not, there are some endangered tigers, too.

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Jack Ma’s Open Sesame For The Wide World

IT IS EASY to overdo the symbolism in the fact that the biggest tech company listed on a U.S. exchange will soon be Chinese. Jack Ma’s e-commerce giant, Alibaba, is expected to to be valued at at least $163 billion after its forthcoming initial public offering on the New York Stock Exchange, eclipsing the $100 billion valuation Facebook achieved with its IPO.

If the share sale raises the expected $21.1 billion, and that would be a conservative sum given some of the hype that has preceded the newly filed prospectus, Alibaba’s would set an new high-water mark for a technology IPO, and be the third largest IPO from any sector. If pre-sale demand for its American Depositary Shares proves to be exceptionally strong, the offering might be repriced so that it topped the record $22.1 billion that Agricultural Bank of China raised in July 2010. Final pricing is expected during the week of Sept. 15th.

For now, the company’s business is China-centric, and is being touted to foreign investors as a way to tap China’s economic rebalancing with the expectation that e-commerce will take an increasingly larger slice of a growing pie of consumer consumption, though prospective investors should note that rivals such as Baidu, Tencent and JD have growing aspirations to loosen Alibaba’s grip on the wallets of the country’s growing middle class. But in a letter to investors, Ma made plain his global ambition. “In the past decade, we measured ourselves by how much we changed China. In the future, we will be judged by how much progress we bring to the world.” It is then that the symbolism will take on more substance.

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How Sino-Centric Is The World Wide Web?

As Mark Zuckerberg, the founder of Facebook, wanders around Shanghai, he will no doubt reflect, and not for the first time, on the fact that China accounts for barely 500,000 of his highly successful social network’s 400-plus million users around the world. He might also like to consider this: by 2016 China will have more internet users, at nearly 800 million, than the U.S., the U.K., France, Germany, India and Japan — combined.

That forecast comes from The Connected World, a Boston Consulting Group report published at the time of the annual Davos shindig in January. If more than a quarter of the 3 billion people in the world the report reckons will be online by 2016 are in China, compared to a tenth in the U.S., should we be thinking of China as being at the center of the Internet and the global digital economy rather than the U.S.?

It may be misguided to think of anything as distributed as the Internet as having a center. Yet sheer weight of population is fast swelling the China node, and challenging the notion that China, by its own volition, can be a web world of its own.

The first e-mail sent from China contained the message, “Across the Great Wall, we can reach every corner of the world” — even if the opposite hasn’t proved particularly to be the case. Yet more and more of that world is increasingly inside the Great Wall. With a population of 1.3 billion and an internet penetration rate of 38.3% at the end of last year, there is plenty of scope for grow the ranks of netizens. In raw number of internet users, China passed the U.S. in 2008, though fewer than one in four Chinese was online then compared to almost three out of four Americans. Between 2007 and 2010 China added more Internet users than exist in the U.S. It now has 513 million netizens. The U.S. has 245 million. If China now had America’s current online penetration level (78.3%), it would already have more than 1 billion internet users.

China, like other emerging economies, is also riding a second underlying trend, a world going digitally mobile. It doesn’t have to put a PC on every desk to get its citizens online, just put a smartphone in their hand. Two-third’s of China’s online population accesses the Internet via mobile phone. This year, for the first time, more smartphones will be bought in China than in any other country. China can leapfrog the desktop just as some emerging economies skipped the landline in telephony.

It can also go straight to the social Web. Tencent’s QQ messaging service is what set the company on the road to becoming China’s largest Internet company by market capitalization. Its Weibo (microblogging) service is easing ahead of rival Sina’s (they have more than 500 million users between them). Its Weixin mobile app took barely 400 days to acquire 100 million users. Social networking is a substitute for having no siblings to talk to at home, we are told. Well perhaps. More likely, weak IP protection and weak competition from TV has driven heavy use of the Internet in China for entertainment, particularly online music and videos, and the conversations that follow that. Tencent has adeptly cashed in on that with online games and entertainment. Consumers expect to pay for mobile phone services. They have grown used to them being free on a PC, to the detriment of any business in a country that was an early adopter of desktop computing.

China has also walled off its domestic market to censor and protect domestic industries. There are only two major economies where Facebook isn’t the leader in social networking and Google in search. One is Russia. The other is China, where Renren leads in social, and Baidu in search. Google’s problems in China are too well documented to need rehearsing here, but it is worth noting that Zuckerberg’s 500,000 Facebook users in China constitute a 0.0004% local market share. It has 50% in the U.S.

China’s Internet companies have been in the happy position of being fast followers of the leading global companies, able to learn from them without facing undue competition from them and all the while riding a fast growing economy playing catch-up in Internet use. It seems inevitable that there will be foreign pressure to open up China’s Internet market, just as there has been to open up other sectors of the economy. Domestic Internet companies are starting to position themselves for that eventuality. The recently announced proposed merger of the online video sites Youku and Tudou is sector consolidation to that end.

% of online population whose first language is English or ChineseEach country will fashion the Internet in its own image to a certain extent. Whether the Internet more globally is Anglo- or Sino-centric is determined not only by users but also by usage and content. More than half the content on the Internet is still in English. That is despite the fact that the share of all Internet users who count English as their first language is shrinking (the blue line in the chart to the left). In 2000, it was almost two in five. As of March last year, the latest available figures, it is, at 27%, barely one in four. Over the same period the share of native Chinese speakers (the green line in the chart) has risen to 24%, or almost one in four, from 9% or one in eleven. Native Chinese language speakers are the second largest group online after English speakers. (Japanese, Spanish and German round out the top five languages online, accounting for a dominating 68%).

Where Chinese’s sway falters is that English is the dominant second language and language of business. Even if the official push to promote China’s culture increases the volume of Chinese language cultural and entertainment material online, the international audience for it will be relatively limited. A tonal language like Chinese is ill-suited to the battering it gets when spoken by non-native speakers. English has proved far more robust. It has even spawned a variant, Globish, for just that purpose.

A shift in geographic center towards the emerging economies is not the only change shaping the Internet. Bits and bytes now follow the Brics, as trade once followed the flag, perhaps. Reflecting the shift from nation states to a global economy bestrode by mulitnationals, it is also forming around digital ecosystems that have companies at their center, such as Google, Facebook and Apple in the U.S., Tencent and Baidu in China and Yandex in Russia. They are shaping an Internet economy that cuts across old national boundaries. BCG forecasts the Internet economy will be worth $4.2 trillion in the 20 richest nations by 2016. By that time, IBM has forecast, 1 trillion devices, from phones to fridges and control systems will be connected to it. BCG says the Internet economy will account for 8% of G-20 nations’ GDP, up from 4.1% in 2010. That would be like adding another Italy or Brazil to the G-20 (we are a sucker for such analogies; and, yes, we know GDP figures are probably not adept at capturing Internet economic activity).

Yet China’s Internet giants have a long way to become the corporate hubs of global digital ecosystems. The commercial growth to come domestically may act as a deterrent to them becoming so. In 2010, the search engine market was worth $1.75 billion and is forecast to reach $14.5 billion by 2015. But over the same period, e-commerce is forecast to expand from $75 billion to $315 billion, at which point it would pass the value of e-commerce in the U.S., estimated to grow from $180 billon to $304 billion in 2010-2015.

China’s sheer size makes national bricks and mortar retailing difficult. E-commerce is further boosted by cheap shipping and high rates of urban broadband penetration, already on a par with America’s at 68%. However, as BCG says, broadband infrastructure alone isn’t enough to push a country to the forefront of the Internet economy. Also needed are “a favorable regulatory environment, strong payment systems, consumer protection for e-commerce transactions, and a willingness on the part of governments, business and consumers to go online”.

Forecasts about the Internet in China should always carry a large caveat not only about the commercial environment, but also about the political uncertainties surrounding them. China censors its social networks internally and the wider web externally with its Golden Shield, more familiarly known as Great Firewall. Leaders brought up in the era of state-run broadcasters and newspapers have very different hopes, fears and aspirations for the Internet than the generation that is growing up with it. China’s digital natives have just as much scope to use it to change society and commerce as their equivalents elsewhere. The question is the degree to which they will be constrained from doing so. What is certain is that the rising tides of the global web, like those of the global economy, are shifting in their direction.

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