Chinese Tech Giants Tencent and Alibaba Saw Profits Plunge in 2nd Quarter

News Analysis

Declining revenues and mass layoffs at Tencent and Alibaba could mark the end of the “golden age” for China’s internet industry. The companies’ profits plunged in the second quarter of 2022, mainly caused by the decoupling of the U.S. and Chinese economies and by the market restrictions imposed by the Chinese Communist Party (CCP).

Chinese social media and entertainment conglomerate Tencent saw its revenue fall by 3 percent to $20 billion in the second quarter compared to the same period last year. This was Tencent’s first quarterly revenue decline since its stock launch in 2004, ending nearly two decades of growth.

Likewise, multinational e-commerce company Alibaba Group’s second-quarter revenue fell by 0.1 percent to $30.7 billion compared to a year ago. This was the first time Alibaba failed to achieve revenue growth since its stock launch in 2014. Alibaba specializes in online retail, technology, and payment services, and it is one of the largest retailers in the world.

In March, Tencent’s Cloud and Smart Industries Group (CSIG) laid off about 15 percent of its employees. In the same month, Alibaba launched a “rolling” layoff, which saw over 13,000 employees lose their jobs in the first half of 2022.

China’s Internet ‘Golden Age’

China entered the internet in the late 1990s, and the past two decades have been a “golden age” for China’s internet, which produced dozens of online tech giants. As of May, Tencent and Alibaba’s market value reached $427.6 billion and $253.2 billion, respectively.

The rapid growth of China’s tech companies created many wealthy individuals. According to Forbes’ 2021 Global Rich List, Ma Huateng, the founder of Tencent, was worth $65.8 billion, ranking 15th in the world; Jack Ma, the founder of Alibaba, was worth $48.4 billion, ranking 26th; and Zhang Yiming, the founder of ByteDance, which owns TikTok, was worth $35.6 billion, ranking 39th.

The rapid growth was fueled by the CCP’s unique state censorship of the internet. Various Chinese social media platforms are exclusive to the country, as the CCP banned YouTube, Facebook, Twitter, and Google, among others. The Chinese social media and video streaming platforms are sponsored by the CCP, with the CCP providing oversight to every aspect of its content. This large-scale state censorship created huge monopolies of tech companies running similar internet services in China, isolating Chinese internet users from information available to the rest of the world.

The massive influx of U.S. dollar capital also fueled China’s tech industry. Because Beijing imposes many layers of restrictions—especially profitability requirements—on publicly listed companies, Chinese tech companies have relied heavily on venture capital from other countries to sustain their growth in the past two decades. For example, South Africa’s Naspers invested in Tencent; Japan’s SoftBank invested in Alibaba; U.S. firms Sequoia Capital and SIG invested in Meituan and ByteDance, respectively.

In 2001, Naspers invested $32 million to buy 46.5 percent of Tencent’s stocks. Twenty years later, Naspers’ total return on this investment was over 4,731 times. SoftBank Group invested $20 million and $60 million in Alibaba in 2000 and 2004, respectively, with a maximum holding of 34.4 percent of Alibaba’s shares and a total return of over 2,000 times, according to Chinese reports.

Decoupling of China-US Economies

Decoupling the world’s two largest economies has led to an exodus of U.S. dollar capital from China and is hitting the country’s tech industries.

In May 2020, the Trump administration pressured the Federal Retirement Thrift Investment Board (FRTIB) to stop investing in China’s stock market and to withdraw $4.5 billion of funds already invested in the country.

In August 2020, then-Secretary of State Mike Pompeo announced that the Trump administration would expand the Clean Network program, which sought to prioritize internet carriers not controlled by authoritarian regimes. Pompeo named seven Chinese tech companies–including Huawei, China Mobile, Baidu, and Alibaba—as potential threats to data privacy, human rights, and U.S. national security. Further restrictions were imposed on the ability of Chinese cloud service providers to collect, store, and process data in the United States.

In September 2020, the Trump White House announced that it would ban “untrusted” Chinese apps, including TikTok and WeChat, from U.S. app stores, and Apple and Google would no longer carry those apps. The move was later blocked in federal court and suspended by the Biden administration. In response, U.S. dollar capital began leaving the Chinese market.

According to a Wall Street Journal report, China’s bond markets saw a reduction in holdings by foreign investors by about 301.4 billion yuan (about $45.03 billion) in just three months in early 2022. Foreigners have also been pulling out of Chinese equity markets, selling a net 33.2 billion yuan (about $4.9 billion) of Chinese onshore stocks from March to May this year.

After years of Chinese state-owned or controlled companies evading audits in the United States, Congress passed the Holding Foreign Companies Accountable Act in 2020, putting more than 200 Chinese companies listed in the United States at risk of being delisted. In March this year, Chinese stocks plunged, with 156 of the 323 China Concepts Stock plunging by more than 90 percent.

Tech Crackdown

In December 2020, the CCP reversed its favorable policy toward China’s state-backed tech companies, proclaiming new anti-monopoly policies and restricting expansions of existing conglomerates. China’s market regulator, the State Administration of Market Supervision, issued three “anti-monopoly” fines to Alibaba and Tencent, claiming that “tech industries are not free from anti-monopoly regulations.” Laws and regulations in China often change overnight and are always open to interpretation by the CCP.

In April 2021, the market regulator fined Alibaba Group 18.2 billion yuan (about $2.78 billion) for mandating anti-competitive agreements for small- and medium-sized online retailers. Tencent was also fined for violating antitrust laws. More platforms were hit with similar fines later that year.

The most significant losses were incurred by DiDi, a Chinese company offering app-based transportation services. The company launched its U.S. stocks in late June 2021. Still, within a week of listing, the CCP’s Cyberspace Administration took down all of DiDi’s apps for “serious violations of laws on the collection and use of personal information.” DiDi’s stock prices plummeted, decimating its market value. On June 10 this year, DiDi was delisted from the New York Stock Exchange (NYSE).

Uncertain Economic Future

In the first half of 2021, the total market value of overseas-listed Chinese companies evaporated by more than $1.2 trillion. Among them, Alibaba’s market value plunged nearly 44 percent from its peak in October 2020, wiping out $344 billion in market value, while Tencent’s shares fell 40 percent from their early 2021 highs, with $400 billion in market value lost.

According to data published by Bloomberg in September 2021, Alibaba and Tencent dropped out of the top 10 companies in the world by market value. In June 2022, PricewaterhouseCoopers announced the top 100 global companies by total market value, and no Chinese companies were included in the top 10.

The Chinese regime once favored the founders of those Chinese tech giants. However, many are currently keeping a low profile amid the CCP’s crackdown on big tech monopolies.

In September 2019, Jack Ma stepped down as chairman of Alibaba’s board of directors, claiming in an open letter that he would return to a career in education. In May 2021, Yiming Zhang announced that he was stepping down as CEO of ByteDance, claiming that he preferred to focus on market and organizational research.

Once the face of China’s rising high-tech industries, those multibillionaires are now choosing to stay away from public view in a country ruled by an unpredictable authoritarian regime.