Monday, August 27, 2018

Dangerous Liaisons With Alibaba and Tencent


Thanks to Alibaba and Tencent, the Chinese markets are headed for "something big". I cannot determine just what it will be but it will be big and probably disastrous. This all stem from the might and size of both companies. 

Just how powerful are they? They are like the genie who can determine who will get rich. Both companies have invested liberally and sporadically into almost everything internet in China.

Tencent is a bit faster in investing in viable startups, probably as an extension of monetising its 1 billion over WeChat users.

There are about 77 private Chinese internet companies valued at $1bn or more that are owned by Tencent and Alibaba. Together they have a cash hoard of over $60bn.

Here are just some of these billion dollar startups, which should be listing in the near future (within the next 2 years) that have been partially or substantially funded by the two giants:
China Literature $6.2bn (Tencent)
Didi $56bn (T & A)
Ele.me $9.5bn (Alibaba)
Meituan $30bn (T & A)
Meizu $4.8bn (Tencent)
VIPKid $3bn (Tencent)
Sense Time $4.5bn (Alibaba)
Pinduoduo $21bn (Tencent)
Guahao Tech/WeDoctor $6bn (Tencent)
Zhongan Insurance $6.5bn (Alibaba)


Its The Platform, Stupid

The root of the problem is the platforms that Alibaba and Tencent would afford to its investee companies. Almost immediately, the startups will get recognition, leverage, a more than critical mass market for their products, inter connected marketing push, etc.

Startups really have little choice but to take money from the two giants. The big guys' sales pitch is always (uttered or non-verbalised) that if they don't take their money, they are going to invest an even bigger amount in their competitor. What choice do they have but to say yes.


The U.S. Experience

The same could almost be said for Apple, Amazon, Facebook and Alphabet (Google Ventures). However, the US experience showed that most of them are more likely to buy them 100% outright and then assimilate them under one company.

It seems that Tencent and Alibaba are more interested to punt and play the finance/market game, whereby a listing can bring forth speculative riches to their coffers. To assimilate startups would be more difficult and work-ladened in that they will then have to work out the synergies and efficiencies.

To be fair, Alibaba is more inclined to assimilate some of the startups, but not Tencent. Their respective business models may explain that: one relies on monetising the 1 billion WeChat accounts while the other is a genuine internet commerce transactions business model.

A 20%-50% stake would allow them to exit gloriously but "business builders" they are not really in the true terms of the words.


Over Reliance

Already there have been 24 companies (over the last 2 years) which have indicated or flagged in their IPOs that Tencent or Alibaba are risk factors. Tencent or Alibaba could adversely affect the business of these 24 companies if there happens to be a fallout between the companies and the two giants (who are usually substantial shareholders as well).

To get a sense of how ridiculous the situation is. A startup will no longer say "we are going to list on Shanghai Exchange or Shenzhen Exchange"..., it would be closer to the truth if they said "we are going to be listed via Tencent/Alibaba".


Danger

Danger is the "interlocking relationships" which already give rise to collusions and manipulations. If you control enough listed companies, say 20 or 40, on one exchange, who is to say you do not "MANAGE" earnings between one or the other??!!

Another is that both Tencent and Alibaba can and will get so big with its array of 50-100 listed companies that they may end up controlling 20% of the total market capitalisation of an exchange. What if that figure goes to 30%? What if its 40%? Left unabated, its the recipe for the biggest bubble ever.


Governance

The US has a stronger regulatory regime. China needs a strong Anti-Monopolies unit to make specific recommendations. You may not be able to stop Alibaba or Tencent in investing in startups, but may could include rules that forces both of them to hold less than 5% upon listing.


That will make it more realistic for investors to view the company being listed. Or determine that if more than 50% of earnings were derived from ONE FACTOR or CLIENT, that these startups cannot get listed. 

If more than 50% of your earnings depended on being on Tencent's platform, there's really no reason for you to be listed because you cannot do without Tencent. Its more meaningful and fairer to absorb the whole unit under Tencent.


Beijing's Balance Beam

Beijing better start muscling in to regulate and govern the rise and rise of tech giants in China for its own sake. The flip side to the current trade wars is the inherently unfair practices by China over global patents and its royalties. To a large extent, that is to help Chinese tech firms grow without much baggage. The time has come to rebalance the two. Rein in your top few tech giants, and be more forthcoming and pliable with respect to global patents and royalty payments.



1 comment:

bruno said...

Too big,very too big to fail giants?When giants fall,they are usually to heavy to get up by themselves.Just ask the too big to fail companies of the US.

The US markets are like they can go up forever.This time when they fall,there will be many crying outside the bars near Wall Street.Other indexes are making new highs,except the Dow.16612 is the magic number in the Dow.

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