Alibaba’s record fine is a ‘warning shot’ in China’s tech crackdown

Alibaba is trying to draw a line under accusations that it behaved like a monopoly after Chinese regulators hit the online shopping giant with a record fine over the weekend. But that doesn’t mean the crackdown on tech in China is over yet.

Joe Tsai, Alibaba (BABA) Group’s co-founder and executive vice chairman,told investors on Monday that the company will not appeal the 18.2 billion yuan ($2.8 billion) penalty that China’s State Administration for Market Regulation (SAMR) imposed on the business. Regulators had investigated Alibaba (BABA) for“exclusive dealing agreements” that prevented merchants from selling products on rival e-commerce platforms — a practice known as “choosing one from two.”

“With this penalty decision, we’ve received a good guidance on some of the specific issues under the anti-competitive law,” Tsai said on the investor call. “We are pleased we are able to put this matter behind us.” The company has promised to cease the “exclusive dealing” practice.

SANYA, CHINA - JANUARY 06: Founder of Alibaba Group Jack Ma present at the 'Ma Yun Rural Teachers and Headmasters Prize' awards show on January 6th, 2020 in Sanya , Hainan province, China. 2019 Award Ceremony of Jack Ma Rural Teacher Award and Headmasters was held in Sanya. (Photo by Wang HE/Getty Images)

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While the fine is equivalent to 4% of Alibaba’s 2019 sales in China, it could have been worse and the outcome appeared to provide some relief to Alibaba and its investors. The antitrust investigation had gone on for months while Beijing scrutinized other big tech firms, including Alibaba’s financial affiliate Ant Group.

Tsai said that the penalty comprised less than 20% of Alibaba’s free cash flowin the past 12 months, while CEO Daniel Zhang added that the change in the agreements with merchants would not have a big impact on the company’s business.

Shares in Alibaba rallied more than 6% in Hong Kong on Monday, though the stock is still down more than 20% since last November, when regulators pulled Ant Group’s mega IPO.

The fine removes “a significant overhang” for Alibabashares, wrote analysts from S&P Global Ratings in a note on Monday.

“The penalty also removes the possibility of more serious consequences,” they added. Under China’s anti-monopoly law, Alibaba could have been fined as much as 10% of its revenue, much more than what was ultimately levied.

Co-founded by legendary entrepreneur Jack Ma, Alibaba is one of China’s most prominent and successful private businesses. But the company’s shares have tanked since Beijing tightened the screws on China’s tech champions late last year. The tightening is part of a regulatory crackdown that President Xi Jinping has described as one of the country’s top priorities for 2021, aimed at “maintaining social stability.”

Joe Tsai, executive vice chairman of Alibaba Group, told investors on Monday that the company is "pleased we are able to put this matter behind us" after Chinese regulators handed down a record fine.

Quelling fears about the future

Still, Chinese state media tried to quell worries about what the fine meant for the future of “platform” companies such as Alibaba and Tencent (TCEHY)over the weekend.

“This penalty is a specific move by regulators to strengthen the antitrust regulations and prevent disorderly expansion of capital,” wrote the People’s Daily, the mouthpiece of the ruling Communist Party, in an editorial Saturday. “But it doesn’t mean [we are] denying the important role of the platform economy in overall economic and societal development. It doesn’t mean the government has changed its supportive attitude of the platform economy.”

Simon Hu, CEO of Alibaba Cloud Computing, delivers a speech during the fifth World Internet Conference in Wuzhen, China's eastern Zhejiang province, on November 8, 2018. (Photo by STR/AFP via Getty Images)

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Alibaba executivesalso sought to assuage concerns. Tsai said that regulators are “affirming” the company’s operations.

“Our business model as a platform is fully endorsed and affirmed by the authorities [that] this kind of model is good for the country’s growth of the economy and also helps promote innovation,” he added.“We feel very comfortable there is nothing wrong with our business, [and with] the fundamental business model of platform companies.”

Tsai also said the regulatory scrutiny marked a “healthy process” that was ultimately good for Alibaba, and allowed the company to get to know how regulators think about these companies. “Every large-scale technology company will face [scrutiny] — in our case, we have experienced this scrutiny, and we’re happy to get the matter behind us,” Tsai said.

Crackdown is not over

Even so, some experts point out that Alibaba’s case still highlights the challenges facing business in China as Beijing continues to probe the private tech sector.

“Alibaba’s fine isn’t a financially crushing blow by any means, and it reflects the company’s progress in negotiating a resolution to its regulatory problems,” said Brock Silvers, managing director of Chinese private equity firm Kaiyuan Capital.

But it was an example of how “opaque policy and private political maneuvering” can suddenly erase shareholder wealth.

“Regulators are now preparing to increase their battle against China’s corporate titans, which should be quite worrisome to global investors who may be increasingly exposed to China risks that have long been unseen and remain unquantifiable,” Silvers added.

The Alibaba fine is a “warning shot across the bow for the entire big tech sector in China,” said Alex Capri, a research fellow at Hinrich Foundation and a visiting senior fellow at National University of Singapore.

“The Chinese Communist Party will continue to exert its will, not only to diminish systemic risk in the financial sector, but to ensure thatBig Tech serves the government as a capacity builder around things like digital currency and data harvesting,” he said. “The goal is to exploit the strengths ofBig Tech while preventing companies like Alibaba from straying out too far on their own. Therefore, the crackdown we’re seeing on Alibaba and Big Tech, in general, is not over.”

— Mark Thompson contributed to this article.