Alibaba calls its $2.8 billion antitrust fine a ‘one-time impact’—but the risk of more regulation lingers

Alibaba, China’s e-commerce giant, on Thursday announced its first-ever quarterly loss since going public. 

For the period ended March 31, 2021, the company reported a $1.2 billion operating loss as a result of the $2.8 billion fine levied by China’s State Administration for Market Regulation (SAMR). 

Calling the fine a “one-time impact,” Alibaba said that its income for the quarter would have been $1.6 billion—a 48% increase year over year—had it not been for the penalty. For the full fiscal year 2021, Alibaba recorded 41% growth in revenue to $109 billion. 

The antitrust fine, levied in April, resulted from a probe that state regulators launched in November. The investigation, now part of a broader clampdown on China’s Internet giants, came after founder Jack Ma publicly criticized China’s financial regulators, and regulators scuttled the planned $37 billion IPO of Ant Financial, Alibaba’s fintech affiliate that Ma also founded. Regulators have forced Ant to restructure as a financial holding company, a move that will subject Ant to regulations similar to those applied to banks.

Despite the quarterly loss, Alibaba is upbeat about the months ahead. It is predicting $144 billion in profits for fiscal year 2022. Daniel Zhang, Alibaba CEO, said, “We remain very excited about the growth of China’s consumption economy, which is benefiting from the acceleration of digitalization in all aspects of life and work.” 

Zhang vowed to “reinvest all incremental profits” in highly focused and disciplined investments into Alibaba’s core commerce, retail, and technology businesses. 

Alibaba’s share price dropped 3% on the New York Stock Exchange after its earnings release. The stock had a volatile 2020, dipping to lows in March because of the COVID-19 pandemic, recovering in the following months, and then declining after antitrust investigations began in November. 

Facing increasing competition in China’s e-commerce space, Alibaba will need to grow its user base, increase the frequency of purchases among its current consumers, and consistently upgrade its technology to achieve its massive revenue target.

Alibaba’s total annual active consumers across all its platforms worldwide shot past 1 billion for the year. Of these users, 811 million were active on Alibaba’s Chinese retail marketplaces—which include top e-commerce sites Taobao and Tmall—an uptick of 85 million for the year. 

Notably, 70% of the new users came from China’s less developed areas,” meaning Alibaba will have to cater to customers in China’s lower-tier cities. For instance, Taobao Deals, a discount shopping app, will be key to serving users at lower income levels. The site’s annual active users grew by 150 million for the year. 

Alibaba will also double down on accelerating user engagement and the frequency of purchases. There is still “a lot of scope” to transform customers into monthly or even daily users, said Zhang.

And while Alibaba would like to put its battle with Beijing aside, it isn’t entirely in the clear. 

There’s some concern among analysts that growth in its burgeoning cloud-computing segment—revenue from Alibaba Cloud grew by 50% this fiscal year to $9.2 billion—could open it up to more government oversight.  

While Alibaba Cloud currently contributes only 8% of revenue, it is a “defining opportunity” and priority for the company, said Zhang. 

But there are risks in cloud computing related to cybersecurity, data ownership, and difficulties in data protection. China is expected to enact a revised Data Security Law (DSL) sometime this year, providing the Cyberspace Administration of China with rule-making powers to govern cross-border data transfers by other holders or processors of data, like e-commerce providers, and to increase penalties for breaches of the DSL law. 

At a time when Beijing is looking to curb Big Tech’s control over citizens’ personal data, any advances or growth in user data could heighten government scrutiny. 

As for the Chinese tech landscape, state action against Ant sent a “strong warning” to other players, says Chucheng Feng, partner at Plenum China Research, an independent research firm. “[It] told them not to test the Party and government’s level of tolerance.”

Thirty-four of China’s top tech firms were rounded up in Beijing last month, including Alibaba rivals and Pinduoduo and firms like Didi Chuxing, Bilibili, and ByteDance, to hear from the SAMR and other regulators about “learning from Alibaba’s mistakes.” The state has ordered the companies to conduct internal checks, emphasizing that follow-up inspections will occur.  

Yet Beijing’s general stance of encouraging technological innovation and entrepreneurship has not changed, given how much the tech giants have contributed to the economy, noted Feng. 

Zhang indicated that Alibaba will accept the penalty “with sincerity, and ensure our compliance with determination. We believe the best way to overcome these challenges is to look forward and invest for the long term,” said Zhang. 

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