China’s warning to big tech: You’re not bulletproof

by TIM CULPAN/ pic by TMR FILE

ANTITRUST is a relatively new concept in China and has been used most notably against foreign companies.

Now, a draft update to China’s existing law puts local Internet giants firmly in regulators’ sights.

That should keep even the most ambitious executives from getting too big-headed as President Xi Jinping keeps power where it belongs — with the ruling Communist Party.

China’s first antitrust law was passed in 2007, a decade after the US sued Microsoft Corp over its then-dominant web browser and operating system in what remains one of the largest such cases in history.

In 2009, local regulators blocked The Coca-Cola Co’s US$2.3 billion (RM9.41 billion) purchase of China Huiyuan Juice Group Ltd. Six years later, US chip designer Qualcomm Inc narrowly escaped being labelled a monopolist in the market for smartphone chips. It was fined US$975 million and forced to lower the royalties it charged handset makers. Today, big names like Alibaba Group Holding Ltd and Tencent Holdings Ltd already attract government scrutiny because of their huge size and the role they play in China’s consumer, content and financial sectors.

While Beijing’s policy of promoting competition is more than just window dressing, broadening the anti-monopoly laws gives authorities another tool with which to keep them in line. Penalties could be stiff: Up to 10% of a violator’s revenue from the previous year.

Under proposed revisions, the benchmark for “an operator holding a dominant position” is somewhat broad. Among the definitions outlined in the draft, dominance includes: One operator holding half the market; two operators holding two-thirds; and three operators holding three-quarters.

In China’s highly competitive market, it may be a stretch for even Alibaba or Tencent to be adjudicated as holding a 50% share — a threshold that would largely depend on what actual market you’re defining.

Between them, however, the two Goliaths are in a commanding position in a few arenas. Payments are an obvious example.

Yet, an escape clause exists in the draft allowing for such dominance if it might be considered in the best interests of the market or the nation.

The very first article refers to “promoting healthy development of the socialist market economy”.

That ’s no mistake. Having allowed its Internet companies to grow into national champions over the past decade, Beijing now expects those giants to cheerlead a cause bigger than themselves.

One implication is that if the big names don’t toe the line, there are plenty of up-and-coming companies that could benefit from government support, whether through loans, tax breaks or regulatory favouritism.

Beijing already has plenty of legal levers it can pull. Antitrust law was used against Qualcomm, yet it was the publishing regulator that brought Tencent to heel over games and the chief Internet enforcement body that forced Baidu Inc to be more circumspect in its sales of healthcare advertisements.

Executives know what’s expected of them. After being hurt by a lengthy halt on the approval of new games, Tencent returned last year with a new patriotic title called “Homeland Dream” — developed with state-run newspaper People’s Daily — that’s populated with communist slogans and patriotic buzzwords. When brouhaha erupted on social media over a tweet sent by a National Basketball Association (NBA) team manager, Tencent acted quickly to halt streaming of the remaining NBA pre-season.

Alibaba also understands the value of patriotism. It is reportedly the company that developed last year’s hit communist ideology app, “Study to Make China Strong”, which includes videos and news promoting Xi’s ideas.

Meanwhile, its financial technology affiliate, Ant Financial Services Group, has rolled out its Sesame Credit social scoring system which helps ensure citizens remain on the straight and narrow.

With growth in China’s Internet sector set to slow, and the remaining players preparing to consolidate the empires they’ve built by surviving some brutally competitive battles, this new anti-monopoly law will remind the Chinese tech executives, who is the real boss. — Bloomberg

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.