Bad Times For China E-Commerce?

Warehouse workers prepare for ‘Double Eleven’ online shopping festival in Lianyungang, Jiangsu … [+] Province of China.

Wang Chun/VCG via Getty Images

Readers of this column will know that I am a longtime bull on China e-commerce. To my mind, e-commerce is one of the great success stories of the modern era, and in China, it reflects an embrace of both technology and internationalization, strengthening the purchasing power of consumers, improving the national logistics infrastructure, and allowing smaller merchants to compete on a more equal footing. There are many strands to the story, but the gist of it is that China e-commerce firms lead the world not just in sales volume but also in innovation, pioneering same-day delivery, live stream marketing, as well as augmented reality and virtual reality showrooms.

But is the shine starting to come off? Recent events have begun to cast a shadow over China’s e-commerce sector. Last November, Chinese regulators blocked the public listing of Ant Financial. Though technically not an e-commerce firm, Ant is an integral part of the Alibaba ($BABA) empire, and grew to become the largest non-bank bank in the world. It started out facilitating e-commerce transactions and then expanded into lending, insurance and wealth management.

Then in December, China’s anti-monopoly regulators posted a notice on Xinhua, the Chinese government news agency: “China’s State Administration for Market Regulation [SAMR] has started investigating Alibaba Group for alleged monopoly conduct including implementing an ‘exclusive dealing agreement’.”  An exclusive dealing agreement is an arrangement that provides privileges to a vendor if it takes all of its business exclusively to one platform.

Also in December, e-commerce platform Meituan ($MPNGF) was hit with a similar allegation in an antitrust lawsuit that claimed Meituan was abusing its market power by excluding Alipay as a payment option on its main app.

Pinduoduo ($PDD) has also come under fire for the deaths of two of its employees. A female employee collapsed while walking home with colleagues at 1:30 a.m. on December 29, which renewed criticism of the long working hours at Chinese internet companies, the so-called 996 schedule that requires staff to work 9 a.m. to 9 p.m., six days a week. Another Pinduoduo staff member jumped to his death on December 9. The reason for the apparent suicide was not disclosed, although local media reports said it may have been related to his work.

All of these recent events raise important questions about the e-commerce sector. In my view, the anti-monopoly issues are legitimate questions for the regulators, and this is true in every market. Coke cannot promise a merchant better pricing if Pepsi is kicked out of the stores. If one platform insists on exclusivity for a product or offers preferred terms for the same, this is monopoly power and should be stopped. In other words, if a platform told Nike it would have a privileged position during a holiday promotion, but only if it did not participate in the promotion on another platform, this is an abuse of power.

The best known example of this issue in the U.S. might be when the Justice Department took action against Microsoft for improperly “bundling” its Internet Explorer web browser with its Windows operating system that allowed the tech giant to dominate the market for web browsers. I can not speak to the details of the SAMR statement regarding Alibaba, but the underlying principle is sound.

Size and market share itself is quite a different matter. Simply because a platform has grown or has a large market share is not intrinsically objectionable, in my view. In a sense, platforms are natural monopolies or quasi-monopolies. Didi and TikTok (Douyin) are natural monopolies in mobility and in short-form videos. Similarly, social media platforms are by definition quasi-monopolies in that users gravitate toward a few favorites and would prefer not to have to use, say, seven platforms to connect with friends. So the fact that Alibaba, JD.com ($JD), and Pinduoduo have significant market share to my mind is not inherently a problem.

I would make a similar point regarding growth or size of the company. Indeed, growth in the e-commerce sector is very much in China’s interest. If you want your firms to become global leaders, you should welcome scale. Amazon is able to lead in many markets around the world because of its dominance in the U.S. Some of the Chinese tech firms should be able to do the same. Europe decided not to foster a large-scale tech sector, and as a result there are few global tech leaders from Europe.

The recent events involving the staff from Pinduoduo requires that authorities carry out a full and prompt investigation. Workplace rules and fairness are important regardless of the company or the level of competition within the industry. Pinduoduo should welcome and assist the investigation, and do everything within its powers to make sure such tragedies are not repeated in the future. 

Yes, large companies in all industries seek to gain competitive advantages that at times create unintended effects that need to be regulated. And quite often, regulators have trouble keeping up with the fast pace of innovation in the tech industries.

Some people think that Amazon (or Alibaba) is the problem. I tend to view them as the solution, providing significant societal benefits. And I hope both firms continue to improve their services and solutions in the years to come.