Image: Alibaba

Alibaba made headlines this weekend in light of an announcement that China’s State Administration for Market Regulation (“SAMR”) has levied a whopping RMB18.228 billion ($2.8 billion) penalty on the e-commerce titan. The “record” fine – which follows from a months-long investigation into Alibaba’s suspected monopolistic practices, including exclusive dealing requirements that prohibit merchants from selling on rival platforms – is not only believed to be the highest in Chinese history, it is being touted as the “biggest move yet in the government’s campaign to tighten its supervision of Big Tech.”

Following a probe into Alibaba Group beginning in late 2020, China’s SAMR determined this month that the Jack Ma-founded behemoth has abused its dominant position in the market by imposing “choose one out of two” requirements on merchants on its marketplace platform. As part of such so-called “choose one out of two” arrangements, which have been born from “an escalating turf fight” between main marketplace players, Alibaba and rival, per CNBC, marketplace sellers are regularly expected to stop cooperating with competitors and conduct transactions with one marketplace entity. 

In particular, IP March managing partner Stephen Yang says that in furtherance of a sweeping “choose one out of two” scheme, Alibaba Group – which consists of a number of digital platforms spanning e-commerce sales to payment processing and cloud computing – is on the hook for “prohibiting merchants on its platform from opening stores or participating in promotional activities on other competitive platforms, and using market forces and even technical means to ensure the implementation of the ‘two-choice one’ requirement.” 

In lieu of any legitimate justifications, such “choose one out of two” requirements are often found to eliminate and restrict competition, as is the case in the online retail platform service market in China in connection with Alibaba’s merchant requirements, according to SAMR. And as a result, such activity amounts to an act of “restricting the counterparty of transactions to do transactions solely with them without justified reasons,” which is defined as an abuse of market dominance and prohibited by Chinese Anti-Monopoly Law.

The dominant player in China’s domestic online retail platform service market, with more than 725 million active customers and revenues of nearly $72 billion for the 2020 fiscal year, Alibaba Group has become the new posterchild of a larger crackdown on anticompetition. While China’s competition regulator “has long been cautious about enforcing antitrust rules against China’s digital economy, which has become a prominent force of China’s economic growth and benefited millions of Chinese consumers,” Slaughter and May attorney Haiyi Liu states that the antitrust investigation into – and subsequent action against – Alibaba indicates a larger shift towards “increased antitrust enforcement in the internet sector.” 

Hardly a one-off action, SAMR’s headline-making crackdown on Alibaba comes as “China has been flexing its antitrust regulatory muscles at the highest levels in the past few months,” according to Zhong Lun Law Firm attorneys Frank Jiang, Scott Yu, and John Jiang, who note that in December 2020, alone, the Political Bureau of the CPC Central Committee put “strengthening anti-monopoly regulation and preventing disorderly expansion of capital” as one of the top priorities of economic work in 2021; the National People’s Congress scheduled the amendment to the Anti-Monopoly Law as a key piece of legislative work for 2021; and  SAMR handed down failure-to-notify decisions against affiliates of three leading platform players – Alibaba, Tencent and Hive-Box. 

SAMR has since upped the ante further by targeting Alibaba in connection with the well-established but difficult to prove “choose one of two” scheme, which Beijing-based analyst Zhuo Saijun telling CNBC that such an overarching scenario “is certainly a problem for the development of retail sales channels,” and also serves as “a business ethics problem,” noting that “this is how monopolies develop.”

As for how such crackdowns are expected to impact the e-commerce marketplace model in China, Alibaba asserted on a call on Monday that in addition to paying the fine, it will “introduce measures to lower barriers to entry and business costs faced by merchants on e-commerce platforms.” Alibaba Group executive vice chairman Joe Tsai simultaneously revealed that Alibaba is “happy to get the matter behind us,” the Chinese titan “does not expect any material impact on its business from the change of exclusivity arrangements imposed by regulators.” 

BBC reported in connection with the call that Alibaba “added that it was not aware of any further anti-monopoly investigations by Chinese regulators, though it signaled that Alibaba and its competitors would remain under review in China over mergers and acquisitions.” While SAMR has not confirmed any ongoing marketplace-centric investigations, BBC’s Karishma Vaswani, nonetheless, asserted that the main takeaway from Alibaba’s investor call was essentially that it “may be the biggest and the first Chinese tech firm to attract regulators’ attention, but [it is] by no means the last.”

In terms of larger impacts that are expected to follow from increased oversight in this arena, state-affiliated Chinese media asserted late last year that “the strengthening of anti-monopoly supervision will not bring about a ‘winter’ for the industry, but rather a new starting point for better and healthier development.” Liu has since echoed this sentiment in part, stating that further government action is expected as part of a larger trajectory of enhanced scrutiny, including potential investigations into other marketplace players, not unlike increasingly active antitrust enforcement that has been underway in the tech sector in U.S. and European Union. However, “despite the tightened regulatory scrutiny, it is clear that the development of the digital economy remains important to China.” 

Such an emphasis on the digital economy by the Chinese government and the tempered approach when it comes to crackdowns makes sense given the sheer might of the market segment. According to data from the China Academy of Information and Communications Technology, the value of China’s digital economy reached 35.8 trillion yuan ($5.5 trillion) in 2019, accounting for 36.2 percent of the GDP. The Global Times reported early this year that the “digital economy is expected to account for about half of China’s GDP and become the main driver of the country’s economic growth” by 2027, thereby, bringing growing competition concerns to the fore, and giving rise to additional issues involving “data security and protection” in the process.