Ant Group 2020 IPO: A bit of perspective
It never happened. Why? And most importantly, what now?
November 2020. Ant Group up for an IPO, the biggest in the world, $34.4BN, with an achievable market cap of $313BN. Ant Group was set to outperform any peer in the industry in market cap, such as PayPal ($230BN), JP Morgan ($297BN), or Goldman Sachs ($65BN).
It did not happen. Days before the IPO, the Chinese government imposed new regulations, restrictions, laws that would have Ant Group reapplying to many licenses and altering its business model to behave like a financial company rather than a technological company.
Came December, and Alibaba Group was announced to soon get investigated by the Chinese regulators for monopolistic practices. Today, people wonder what the future will be for Alibaba. In the media, everybody was asking: where is Jack?
Letās go back for a bit to gain some perspective.Ā
Ant Group
Ant Financial Services Group is a Chinese fintech company, and one of the many in the gigantic conglomerate of Alibaba. It handles more than $17 trillion in payments annually, with 1.3BN active users (to compare, Paypal has 346M accounts).Ā
The Executive Chairman is Eric Jing, who stepped down from his role of CEO in December 2019, a role that Simon Hu serves currently. Hu worked for Ant Group since 2006 and has held many leadership positions within the Alibaba conglomerate. As per Jack Ma, the most popular face in Alibaba, he stepped down from the board of directors but he still holds a seat in Alibaba Partnership, and thus, his influence in the company remains strong.
Ant Group started off in 2004 as Alipay, the payment arm of Alibaba via escrow. In the beginning, it was a catalyzer for the Alibaba platform growth, but it was not capturing much value since it was only a means for payment. It separated from Alibaba in 2010 as an independent company, and nowadays it offers more services involving P2P lending, consumer and business credit, investment tools, loans, and insurance, but as Hu claims, 50% of the daily transactions remain free.Ā
Ant Group remains the catalyzer of Alibabaās growth via its consumer credit offerings in Huabei (āJust Spendā), which represent 80% of the credit offering of Ant Group and contributes to the massive sales happening yearly in Singleās Day, which were of $38.4BN in 2019 (higher than the expected IPO value of Ant Group, which, was set to be the biggest in the world).
Ant Group has been historically regulated as a technological company rather than a financial services company. Its business model is that it operates as a marketplace originating loans, but relying on third-party financial institutions to underwrite them: 98% of the loans in 2020 were underwritten or securitized by other parties. The delinquency rates for these loans are impressively low at 1.5% historically.
Chinese government
The governance model in China is that of a socialist republic of one-party, the Chinese Communist Party, whose General Secretary is the Chinese President Xi Jinping. This regime was established in 1949 with the creation of the Peopleās Republic of China, characterized by a strong control by the government of the economy. This control has been loosening over time, where the government shows their search for a balance between tight government control on the economy and incentives for people to be more productive, entrepreneurial, and work harder.
The Chinese Communist Party employs 90M people in China (the Chinese population is 1.4BN people) and does not act as a single block: since the liberalization in the 1990s, it became a fragmented authoritarianism where the different factions have to compete and bargain among themselves. The image below shows it.
This shows two important aspects: the amount of bureaucracy it can take to deal with the Chinese government, and how complex it can get to align the goals in the CCP, especially if they get mixed.
Story of a relationship
The story of Chinese industrialization (1949-today) is impressive, fueled by political plans wanting to take advantage of globalization for the Chinese economic growth. The importing nations were demanding cheap talents and cheap exports, and the Chinese government took advantage of this trend to have China become a leading player in the manufacturing of goods and the cheapest producer.
But being the worldās cheapest producer using cheap labor has an ending point. There should be an inflection point in which domestic demand grows as the society becomes more wealthy.
Ant Group, Alipay back in the day, was a catalyzer of this domestic economic growth. E-commerce could not really flourish in a China with poor infrastructure, weak laws on consumer protections, and customers wondering if they were throwing their money into the air or actually receiving their order.
Alibaba faced this issue when aiming to grow, and in 2004 came up with Alipay as a means of payment via escrow solution: the client would make the payment, and the supplier would not receive the money until the product arrived at the clientās site in perfect status. The client would be refunded otherwise. It was not perfect at the beginning, but it grew in popularity and use, becoming an enabler and a growth engine for the domestic e-commerce scene in China.Ā
It is worth mentioning that trust is a significant issue for the Chinese consumer when buying domestic goods. They have gone through food scandals such as the powder milk for infants, which effects in consumer behavior remain today. In the e-commerce industry, there were reports in 2002 that 14% of the Chinese people who bought online had an actual experience of paying and never getting their merchandise.
The takeoff of Alibaba cannot be solely attributed to a genius idea of Alipay. If a means of payment is not widely accepted and widely used, it will never become relevant. Alipay was introduced along with Taobao when it was openly competing against eBay China. The implementation of Alipay ran faster and more smoothly thanks to the good relationship Jack Ma had with the Chinese government, which saw with good eyes the fact that Taobao was promoting entrepreneurship and growth among the Chinese. This made it easier for Alipay to partner with the major banks and expand its service offering, to the advantage of their users.
Today Alibaba Group is a remarkably huge conglomerate for e-commerce, one that boosted domestic consumption in China and which sales have nothing to envy to Amazon. Its main competitive advantages reside in the ability of Ant Group to provide consumer credit (80% of the credit it provides is for consumers) and vast knowledge of the Chinese consumer via data collection.
Alibabaās technological base makes it take advantage of the Technological Revolution taking place. This Technological Revolution brings a lot of prosperity but that has an exponential essence that results in fast and sudden change and is hard to control in nature. The previous industrial revolutions enabled the flow of goods around the world, and that was easy to control by governments. The current revolution, however, impacts communications and facilitates the flow of transmitting ideas, which is much harder to control by any government. This threatens the goal for government control of the CCP.
Jack Ma, even having retired from Alibaba, remains an obvious defensor of this revolution and of the laws favoring it. Regulations supporting the Technological Revolution can bring prosperity to the country and can help Alibaba stay competitive in business. In October 2020 he appeared at a conference encouraging the Chinese government to relax the regulations on technology: āWe cannot regulate the future with yesterdayās meansā.
The Chinese government is more a proponent of high modernist authoritarianism, in which a system that is ordered is imposed to serve specific purposes, in this case: control. However, Jack Ma is not wrong in saying that the current Technological Revolution is complex and that the system making it work is probably more complex, and might be perceived as chaotic by regulators.
But with the choice in front of them, the Chinese regulators chose government control and order. Ant Group filed for an IPO in August 2020 that was going to happen by the beginning of November. Highly promising, the worldās biggest, of $34BN and an achievable market cap of $317BN.Ā
On November 3rd, the Chinese government enforced new laws on credit institutions. This meant that Ant Group had to reapply for a number of licenses and meet capital requirements in its law. In December 2020, the Central Bank of China commanded Ant to restructure its operations to meet regulatory guidelines. For this, Ant Capital would need to constitute a separate holding. The regulators want Ant Group to be solely focused on payments and drop credit, loans, insurance, etc. Furthermore, they have claimed that they might investigate Alibaba for monopolistic practices.
Jack Ma reappeared in the public on the 20th of January, having Alibaba shares increase 8% in the Hong Kong stock market after having decreased 25% after the October conference and during the rumors of him having disappeared (there are literal questions in Google for this). But this is anecdotal, the future of Alibaba and its share value is yet to be determined.
What comes next?
The Ant Group IPO has not been canceled, just postponed for at least six months. The bureaucracy awaiting the second attempt might be outstanding, but perhaps some of the former good relationships Jack Ma maintained with the CCP will allow it not to be so dramatic.
Regulators demand a change in Ant Groupās and Alibabaās business model. Having Ant Group solely focused on payments is no minor thing: payments provide the smallest benefit and no longer serve as a differentiator for Alibaba.Ā
As per the credit arm, if it definitely disappears, it will harm the e-commerce business model of Alibaba, which is fueled by financing purchases. I however think this will be preserved, it may be spun off from Ant Group but it just makes sense to Alibaba Group to fight for the system it created that helped them increase their revenues so much.
And Alibaba is far from alone in the Chinese competition landscape, the conglomerate already faces a lot of strong, established competitors on all of their fronts.
On the bigger picture, this case shows how tricky it is to regulate the Technological Revolution for a socialist, state-controlled regime like the Chinese. They confront a dilemma: How do you balance regulation and competitiveness in the age of the Technological revolution, with incentives for state control and world economic power?
Sources
Alibaba Group ā Alibaba Partnership
Bloomberg - China Tells Ant Capital it must meet new requirements prior to their IPO
Britannica ā China: The Role of the Government
Chinese Characteristics in Substack ā Alibaba: From growth to value
Forbes ā Eric Jing profile
Marc Rubinstein in Medium ā How Ant Group Became the Biggest Fintech Company in the World
Not Boring in Substack ā BABA Black Sheep
Reuters ā Ant Financial appoints Simon Hu as CEO, part of Alibabaās executive shuffle
RibbonFarm ā A Big Little Idea Called Legibility (Summary of Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed by James C. Scott)
The Wall Street Journal ā Ant Founder Jack Ma Faces Backlash from Regulators
Voa News - Chinaās Central Bank requires Ant Group to meet regulatory guidelines
World Economic Forum ā A brief story of Chinaās economic growth
Xataka ā Ant Financial, la fintech de Jack Ma de los 150.000M de dĆ³lares