Squishing the Ant: Why Beijing is finally taking steps to tame Alibaba

Is Alibaba becoming too big to fail?

It’s a question that’s on the minds of Chinese regulators. In early November, the Shanghai Stock Exchange abruptly canceled the public offering of Ant Group, Alibaba’s financial technology company, after a meeting between Chinese watchdogs and Jack Ma, Alibaba’s co-founder and Ant’s controlling shareholder. (Ant’s listing would have been one of the world’s biggest ever stock market debuts.) Both sides have not disclosed precisely what was discussed at the meeting; and while observers note that the surprise suspension was driven in part by politics, make no mistake: regulators expressed reservations about Ant’s growing power in the Chinese financial system.

At a media briefing, a spokesperson for the Chinese foreign ministry said the decision was “made to better safeguard capital market stability and protect investor rights and interests.”

The instinct to guard investors’ interests and rein in giants like Alibaba is the right one. We have seen, after all, how difficult it is to constrain large financial institutions. And at a time when governments around the world—including the US—are cracking down on monopolistic practices and the public has become increasingly wary of big technology companies and their impact on growing inequality, it’s clear that Chinese regulators have their work cut out for them.

Alibaba casts a long shadow in China. The company’s sprawling network of e-commerce, cloud computing, brick-and-mortar retail, and other businesses, are deeply intertwined in China’s economy. Moreover, Alibaba is a source of national pride—an exemplar of Chinese ingenuity and resourcefulness. Regulators have been inclined to give it the benefit of the doubt.

But that may be changing. Beijing recently unveiled draft antitrust regulations that, for the first time, outlines what constitutes anti-competitive practices. The rules span a variety of issues from payment methods, to pricing, to the use of data to target customers.

A new cause for concern is Alibaba’s move into China’s $4 trillion manufacturing market. In September, Alibaba announced Xunxi, a new “smart factory,” designed to highlight its capabilities in helping small- and medium-sized enterprises, or SMEs, automate their supply chains using data analytics.

This is, of course, Alibaba’s specialty. Alibaba’s data-driven technologies, including real-time resourcing and automated in-house logistics, can help manufacturers adapt their supply chains to market conditions, thereby reducing costs and increasing efficiency. Most SMEs don’t have the resources to do this on their own—especially in light of the looming labor shortage in China.

But Alibaba’s move represents a threat to Chinese society, SMEs, and also the country’s competitive marketplace. For starters, the increasing use of automation could have dire consequences for China’s workforce. Research shows that while the use of “brilliant machines” may not displace employment, it does factor into the polarization of jobs, disproportionately helping high-skilled professionals while lowering opportunities for other workers.

What’s more, by partnering with Xunxi, SMEs run the risk that Alibaba will use their data to launch competing products. European Union regulators in November brought antitrust charges against Amazon, saying the online retailer unfairly uses its size and its ability to harvest nonpublic data to harm rival sellers who use the company’s platform to reach customers. (Amazon, which faces similar scrutiny from the Justice Department and Federal Trade Commission, denies any wrongdoing.)

But Chinese regulators ought to take note. Alibaba’s growing power and size could hurt China’s 50 millions SMEs— the lifeblood of the Chinese economy accounting for 80% jobs and 60% of GDP. Strict regulations that protect against potential abuses of power are necessary.

Alibaba has an obligation here, too. The company has had a lot of financial success, and with that success comes a responsibility to be an honorable participant in the economy. Alibaba cannot focus solely on what’s best for its balance sheet. It must behave ethically, invest in employees, deal fairly with suppliers, and support its communities.

This may sound antithetical to long-held ideas about the purpose of a corporation, but even in the capitalist U.S., there is growing agreement that companies have a duty to more than just their shareholders. Last year, the Business Roundtable, comprised of leaders at some of biggest firms in the country, pledged that companies share a fundamental commitment to “all stakeholders”—meaning, workers, society, and the planet. The group’s aim was to redefine corporations to promote ‘an economy that serves all Americans.’

To be sure, China and the U.S. are very different countries with very different economies. And yes, the Business Roundtable’s proclamation arrived well before the onset of a pandemic that has devastated the global economy and curbed many company’s best-laid plans.

But Alibaba’s scheme to get ever bigger and expand into areas like manufacturing is cause for concern. It is important to seek a balance between how companies maximize shareholder value and support societal welfare. Regulations are needed—as is a public reckoning from the company on the role it should play in society. The goal is to level the playing field for SMEs and to create a sustainable and thriving economy—for everyone.

Sharmila C. Chatterjee is a Senior Lecturer in Marketing and the Academic Head for the Enterprise Management Track at the MIT Sloan School of Management.