Alibaba is entering a long probation. A $2.8 billion fine for preventing sellers from using rival sites is a light penalty for the Chinese e-commerce titan’s abuse of its market dominance. But orders to spearhead healthy competition raise the prospect of further changes that could cause serious damage. Coupled with the squashing of the initial public offering of its financial affiliate Ant, Beijing is coming down hard on technology giants.
Boss Daniel Zhang and top executives on Monday assured investors that the company’s regulatory woes are behind it, sending its Hong Kong shares up 5%. After a four-month long investigation, the State Administration for Market Regulation concluded that Alibaba’s annual revenue accounted for over 70% of the top 10 e-retail platforms between 2015 and 2019 and called out its punishment of merchants for doing business with rivals.
The immediate financial penalty is a manageable cost of doing business against the $5 billion of free cash flow Alibaba is forecast to generate in the three months to March, per Refinitiv data. SAMR is claiming just 4% of Alibaba’s 2019 domestic revenue, half the proportion than in 2015 when it fined U.S. chipmaker Qualcomm $975 million, and well short of the maximum 10% permitted.
Yet it leaves a sharp sword hanging over Alibaba. The company will have to submit annual self-assessments to authorities for the next three years. And though the probe was focused narrowly on forcing merchants to transact exclusively, regulators have asked Alibaba to make “thorough rectifications” based on sweeping guidelines ranging from leading the development of healthy competition and innovation for the entire industry to opening up its data.
The lack of detail is ominous: Alibaba uses data in its core business to help sellers reach more customers as well as in newer ventures like logistics and cloud computing. Vague regulatory demands put it at the mercy of the whims of officials.
This comes as e-commerce upstarts led by Pinduoduo chip away at Alibaba’s market share and as a shift to holding more inventory and logistics squeezes margins. Total annualised shareholder returns are barely one-third of its top rival JD.com over a three-year period. A record fine sends a message that China is ready to have a bigger say in how powerful private companies are run.