April 13, 2021

Asia

CHINA: Alibaba penalty heralds new era of antitrust enforcement

BY Gabriel Wildau

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( 4 mins)
  • China’s anti-monopoly regulator fined online retailer Alibaba a record Rmb18bn (USD 2.8bn) for preventing merchants from selling on rival platforms.
  • After a decade of laissez-faire, Chinese regulators appear poised to impose tighter antitrust regulation on other dominant internet platforms like Tencent, Meituan, and Pinduoduo.
  • Beijing believes that a few large platform companies are capturing a disproportionate share of the benefits from digitization; regulators want to tilt the scales back towards small businesses.

In announcing its fine on 10 April, the State Administration of Market Regulation (SAMR) said Alibaba’s s behavior hindered competition and stifled innovation. The same day, a commentary in People’s Daily, the Communist Party’s official mouthpiece, said that “monopoly is the great enemy of the market economy.” The fine and accompanying political messaging reinforce our view that the ongoing crackdown on Alibaba and its financial services affiliate, Ant Group, does not signal a broad offensive against the private sector or a political vendetta against Jack Ma. Rather, the crackdown reflects specific concerns about a few large technology and fintech platforms.

A new era of antitrust enforcement

Two previous notes focused on Beijing’s concerns about financial risks from Ant’s lending business, as well as Ant’s quasi-monoopolistic control of transaction data from digital payments. These concerns extend beyond Ant: Tencent and JD.com will also fold their financial business lines into financial holding companies to comply with new industry-wide regulations. But the anti-monopoly action against Alibaba should not be conflated with separate concerns about financial risk that are driving tighter regulation of fintech. While the People’s Bank of China is leading the campaign against financial risk, the fine on Alibaba reflects a parallel policy agenda, led by the SAMR, aimed at ensuring competition in the technology sector. Chinese regulators see their actions as part of a global trend of antitrust enforcement against powerful internet platforms, including US and EU lawsuits against Amazon, Google, and Facebook.

The SAMR has been gradually ramping up enforcement since the agency was created in 2018 from the merger of several precursor agencies. China’s first anti-monopoly law was enacted in 2008, but until recently the law was rarely used against technology companies. China’s parliament released draft amendments to the anti-monopoly law for public comment in early 2020 that will likely gain final passage this year. In November, SAMR issued draft guidelines specifically for internet operators, which were finalized in February. That same month, 17 central government agencies established a new interagency mechanism for combating anti-competitive practices. Last July, SAMR also launched the first-ever anti-monopoly investigation against a variable-interest entity. This structure is common among Chinese technology companies, but such entities had previously been effectively immune anti-from monopoly enforcement.

Small business “Davids” vs platform “Goliaths”

SAMR appears to be focused on combating several common monopolistic practices. One is discriminatory pricing, as some platforms were found to be charging higher prices for the same product to long-time users. A second problem is bundling, as when, for example, a travel booking platform misleads users into purchasing travel insurance from the platform company alongside airline tickets or hotel reservations. Third is forced exclusivity, the offense for which Alibaba was penalized. There is speculation that food delivery and group buying platform Meituan may be the next platform to be targeted for this practice.

Though SAMR commonly defines its objective as protecting consumers, in practice the goal of anti-monopoly enforcement is to help small businesses. Regulators increasingly recognize that the benefits of digitization and online commerce have flowed disproportionately to a handful of large platforms, even as the government heralds small businesses as the “lifeblood” of China’s economy. The harsh reality for most Chinese small businesses – to an even greater degree than in other large economies – is that an effective online presence requires participation with one of a few of large platforms such as Alibaba/Ant, Tencent, JD, Meituan, and Pinduoduo. Local media discussions commonly frame the issue in terms of Davids vs Goliath. Indeed, Covid-19 may have given new impetus to the latest enforcement campaign, because the pandemic disproportionately harmed small business, while accelerating the shift of all kinds of activities to the online sphere.

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