December 3, 2023

Eight months ago, the future looked bleak for China’s largest internet company. Covid-era lockdowns have dampened sales, while Beijing’s draconian tech regulations have spooked even bold Chinese investors. Shares in Alibaba, Baidu and Tencent fell to their lowest levels in several years.

With the Chinese economy now reopening, earnings reports from tech giants this week showed tentative signs of recovery. But the financial results, released for the first time since the end of “zero Covid” restrictions, also reflect the uneven pace of China’s economic recovery and suggest that the companies’ transformation, while underway, may not be smooth.

Baidu, China’s leading internet search business, and Tencent, owner of the ubiquitous messaging app WeChat, both posted double-digit revenue growth in the first three months of this year compared to the same period in 2022, the first time in more than a year that they have reached that level.

Baidu’s revenue rose 10%, and the company said Tuesday that strong digital ad sales continued into the quarter. Tencent on Wednesday partly attributed its 11 percent revenue growth to a rebound in digital payments, as Chinese consumers started spending money again after a long dry spell. Major Chinese video game company Tencent also benefited from the relaxation of gaming license restrictions last year after a nine-month freeze.

On Thursday, Alibaba reported revenue growth of 2% year-over-year, below analyst expectations. The company said that its core online e-commerce unit and cloud computing unit reported a single-digit decline in sales, even as online shopping started to rebound in March.

Tech companies have had a tumultuous two years amid strict regulations in Beijing. Officials halted the public offering of Ant Group, the fintech company founded by Alibaba, after Alibaba founder Jack Ma criticized financial regulators for stifling innovation in 2020.

In January, a month after China abruptly lifted its “zero-Covid” restrictions under public pressure, a senior central bank official said the campaign against tech companies was “almost doneChina’s top leader, Xi Jinping, is now hoping the country’s tech industry can provide a lifeline to growth. Fueled by escalating tech competition with the United States, China is eager to revive its struggling giants.

“For them, the worst period in terms of policy is over,” said Tian Hou, founder of TH Data Capital, a Beijing-based data analytics firm. “The government now wants to use these Internet companies to create more jobs, innovate and catch up with the United States.”

Investors’ initial reaction to the companies’ first-quarter results was muted. Shares in Baidu and Tencent were little changed this week in Hong Kong, but both have risen since October. Alibaba shares fell about 6% on Friday, but are down about 2% for the week.

The fate of these companies will remain closely tied to the Chinese economy. Local governments are saddled with debt. The real estate sector, long a stimulus for economic growth, is stalling. Data released by China’s National Bureau of Statistics in April disappointed analysts: Chinese people spent more on food but appeared to shy away from items such as cosmetics and cars. Youth unemployment hit a record 20.4%.

“People are out on vacation, but they’re spending less compared to pre-pandemic levels,” said Bruce Pang, chief economist for Greater China at global real estate and investment advisory firm JLL. “They’re cautious because They have less confidence in their job prospects and future income streams.”

Alibaba is undergoing an overhaul. It announced a restructuring in March, splitting the company into six divisions. This week, it announced the spinoff of its key cloud unit, which the company says will be completed within 12 months in preparation for a public listing.

The e-commerce giant also said it was exploring public offerings for its grocery chain and logistics unit after a series of regulatory probes prevented many promising tech companies from going public.

The unraveling of Alibaba, one of China’s most iconic corporate empires, shows the extent to which the tech industry is being reassessed. Chinese internet companies have grown over the years as millions of Chinese go online. Recently, this migration has reached a peak, with various companies fiercely competing for the same customers.

All three of China’s internet companies are hoping to tell investors a new story, one tied to new technology-based services such as artificial intelligence and ChatGPT that promise to upend the old ways of doing business.

Alibaba Chairman Yong Zhang, who will also serve as chief executive of Alibaba’s soon-to-be independent cloud unit, described artificial intelligence as a technology that will “reshape every aspect of our society”.

The companies are hoping that investments in AI will pay off for their cloud computing arm, the technology that underpins AI services. Baidu said its artificial intelligence cloud unit turned profitable for the first time last quarter.

This year, Baidu and Alibaba launched AI systems similar to ChatGPT, developed by OpenAI, a Silicon Valley research lab. Baidu said it had requested approval for the project after China’s cyberspace regulator issued guidelines for artificial intelligence systems in April.

Tencent is making “good progress” on its AI models, the company said on Wednesday and the team is planning new AI products, without elaborating.

The companies are focusing their AI services on businesses or businesses — in part because chatbots with broad appeal could undermine China’s steadfast grip on information. Both Alibaba and Baidu said more than 100,000 companies have lined up to try out their artificial intelligence products.

Ali, Baidu, and Tencent are all undergoing transformation in difficult times. Beijing’s grip on the economy is tighter than ever. Fierce competition with the United States has kept Chinese companies from acquiring some of the cutting-edge microchips necessary to develop the most advanced artificial intelligence systems. Analysts say a lucrative domestic customer base — China’s state-owned enterprises — is ditching private cloud computing providers in favor of government-backed alternatives.

More recently, U.S. officials have called for scrutiny of Chinese cloud service providers such as Alibaba on national security grounds. Alibaba said on Thursday that its cloud business declined last quarter in part because a major customer pulled out of its international services for “non-product reasons”.

These difficulties in China and abroad have deterred some investors, knowing that Internet companies are unlikely to return to the growth rates of a decade ago. Others thought they deserved a second look.

“I would suggest forgetting about the past,” said Kenny Wen, head of investment strategy at asset manager KGI Asia in Hong Kong. “Now that they’re back, we’re seeing a gradual improvement. We need to give them a new metric.”

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