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The Scale of Alibaba Versus China's Regulation Hurdles
Understanding China's E-commerce giant, how it supercharged its scale, and the hurdles faced amid China's crackdown in 2021.
This article serves as an extension of key points and clarifications from the main podcast link (recorded on 29th May 2021).
NOTE: As always, the information presented is for entertainment purposes only. Full disclosure can be found in the “About” section. It does not serve as any form of advice or recommendations for investment decisions, with information obtained only from publicly available sources. This was recorded in May 2021, and has no direct or indirect relationship with Facebook / Meta in speaking for the company or about its competitors in similar industries.
We all heard about Alibaba, and in recent months, the amount of regulatory scrutiny it has amassed, alongside other Chinese-tech players such as Tencent and Bytedance. From the podcast recorded in May 2021 and now, let’s examine what changed, and how Alibaba is affected.
First, it is worth going through the business segments:
1688: A directory of manufacturers and suppliers. You could consider this the B2B platform where manufacturers and suppliers secure contracts with one another.
Tmall: “Foreign” brands.
Taobao: Lower-ticket items for consumers, usually sourced via 1688.
Freshippo: High-tech supermarket. Order stuff from your smartphone (think QR Codes or menus), get them delivered straight to home. You could also drop by their supermarket, test out the goods, then make orders from there.
Consumer Delivery / Ride-Sharing
Ele.me: Basically a Deliveroo or Grab, but for China. This is generalized as the digitalization of the restaurant and service industry. These shops are connected by a single app, and Ele.me facilitates ordering and delivery to the consumers on their behalf.
Cainiao: The delivery network powering Alibaba’s whole e-commerce (minus consumer delivery). Cainiao also covers cross-border and international commerce but is related to Alibaba’s China-based sites and apps. This is because some products are sourced overseas, such as Tmall Global.
Lazada, Ali Express: These are the international segment of Alibaba’s “ventures” overseas. Lazada has a footprint in Southeast Asia, fighting against Shopee.
Ali Express is a delivery network outside of China, that does quite similar things to Cainiao. You could say it’s the backbone supporting e-commerce outside China, supporting businesses such as Lazada for fulfilment.
Alibaba Cloud: Cloud computing and storage needs of Alibaba creates synergy in having their own Cloud arm. The same infra powering Alibaba behind the scenes is provided via Alibaba Cloud.
So Many Initiatives! Why Though?
At scale, organizations benefit from internalizing essential infrastructure or services to gain cost-synergies. Additionally, doing so helps in negotiating with the outside world.
Take a basic example whereby you’d like to purchase 10 bottles for your small business. In another deal, someone else wants to buy 1000 of the same bottles. If you were on the other side of the table - the supplier - who are you more inclined to entertain? A small order, and would you be able to give a token discount to the person buying 1000, as compared to the 10?
That’s the kind of cost-synergies Alibaba can enable, but on different dimensions such as:
Cloud storage: For all your images, videos, messages used in all of Alibaba’s commerce
Compute: With all that data, you’re going to want insights or actionable signals to make your platforms smarter. You’d need a lot of computing power though, and instead of outsourcing this, why not build it in-house so we can control when we can ramp it up? (e.g. Singles Day, for extremely high demand events)
The reason this is necessary is that it’s a technological arms race. Talent, cloud storage and compute or scarce as more data and use cases are generated daily.
As there is more data, and more offerings on the platform, you can get very strong AI models that reinforce the entire chain again. And this is a flywheel that works well once you have your own ecosystem.
To secure one’s position, large players tend to consolidate and offer these internal services given their advantage of scale, and this serves as a moat for any new entrants to enter.
Factors Affecting Alibaba Today
A couple of items changed since May 2021, and reinforced my views on regulation as a factor on Alibaba. Here’s the top three:
Regulation of Recommendation Algorithms
Also in Sept 2021, the Draft Internet Information Service Algorithmic Recommendation Management Provisions were issued. This was a “framework for the regulation of recommendation algorithms” in a nutshell.
E-commerce primarily uses search filters and personalization techniques heavily, and this regulation definitely adds friction to this capability.
Alibaba isn’t the only one affected. Tencent, heavy in content and gaming, and other social media sites and gig work platforms are affected too.
Some examples this framework regulates
Creation of fake user accounts to falsify traffic numbers
Self-preferential treatment and evasion of supervision
Manipulation of topic lists and search rankings or popular search terms
The coverage is vast, and it is unclear how the PBOC will have a final say in each algorithm built within each tech company and has a high probability of overreach given the scope of the framework.
One thing is for certain: I see this as a “blunt-force” instrument for the PBOC to reign in control over Chinese tech companies, while at the same time driving towards common prosperity, given the rising income inequality in China.
Data Storage Regulations
Chinese companies must store the data in China. If it were to be shared overseas, requests must be made to a centrally managed unit of the Chinese government. This could make an international expansion for Alibaba, especially for their cloud offerings.
It would also pose uncertainty on what kind of data can be used or mixed, for example, Twitter being from overseas, but having some key insights regarding the next trend (total speculation here). And from this, Alibaba may miss trends from having this data source blocked off.
It’s not just AliCloud affected by this; this cuts across all other Alibaba services, and from a data management standpoint, how exactly to navigate this to offer services overseas is a big slowdown in expansion to foreign markets.
Social Good - Donations of USD 3-5Bn over 5 years
From the time of recording, I thought if it were possible that more demands from the government could pose new challenges. This came from the ‘Common Prosperity’ drive, where Alibaba pledges 15.5B USD for societal good. There goes your Free Cashflow from last quarter.