China's Tech Entrepreneurs Need to Watch Their Backs

By Li Yuan Features Dow Jones Newswires

Amazon.com Inc.'s recent bid to acquire Whole Foods Market Inc. inflamed concerns in the U.S. about big tech companies taking over America.

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In China, that's already happening. Alibaba Group Holding Ltd. and Tencent Holdings Ltd. are online-offline conglomerates each with hundreds of millions of users. The pair--directly or through companies they invest in--provides services and products across a range of businesses from retail, media and entertainment to health care, payment, banking, logistics and transportation.

Their market capitalizations, Alibaba at $358 billion and Tencent at $350 billion, are much higher than those of the state-owned enterprises that dominate the Chinese economy. The country's biggest bank, Industrial and Commercial Bank of China, is valued at $261 billion; the telecom titan China Mobile is valued at $218 billion. The tech giants, with their wide reach into many facets of daily life, touch ordinary Chinese in ways state companies don't.

As their size and influence grow, Alibaba and Tencent are entering uncharted territory: Never in nearly seven decades of Communist Party rule have private-sector companies held such sway over the economy and society. How well they handle relationships with competitors, old-line companies and, ultimately, an authoritarian government that isn't used to sharing power will be a top challenge in coming years.

"The most important counterbalancing force against Alibaba and Tencent will probably not come from their direct competitors but the government and the traditional industries they disrupt," says Yin Sheng, an independent technology consultant who owns shares in both companies. As the two tech companies push further into other sectors, Mr. Yin believes established businesses will lobby the government to enforce tax, antimonopoly and other rules.

A Tencent spokeswoman said the company "views our peers in the internet sector and traditional industries as partners" and "the healthy growth of the internet industry will benefit users, industry players" and the economy. Alibaba didn't respond to requests for comment.

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Alibaba and Tencent need to tread carefully. Some of China's wealthiest businessmen ended up in jail, often when they appeared to fall out of favor with the government. Earlier this month, the government said it was investigating the borrowings of some highflying private conglomerates to rein in runaway debt.

Bitterness from the old guard is already spilling into view. On a popular business program on national TV late last year, beverage tycoon--and once China's richest man-- Zong Qinghou dismissed as "nonsense" Alibaba Chairman Jack Ma's idea that a new world is being created as data and growing computing power transform industries from retail to manufacturing.

"He's not in the physical economy. What does he make?" Mr. Zong said. The other two panelists, heads of two biggest electronic appliance makers, concurred. An Alibaba executive was quoted in Chinese media at the time as saying that Mr. Zong's comments were illogical.

Mr. Zong is one of the more outspoken among a cadre of traditional entrepreneurs raising questions about whether the internet businesses should continue to benefit from preferential policies. Online shops operated by individuals and small businesses, for example, pay extremely low to no taxes under a policy that was aimed at nurturing a fledgling e-commerce sector. But that sector is now huge.

Members of this business lobby raised the e-commerce taxation issue during spring meetings of the legislature and a top government advisory body. They noted that current tax rules put traditional retailers at a disadvantage and urged the government to heed their complaints because they employ more people than the online firms.

Big tech firms have also been called bullies and monopolists because of their treatment of competitors. When Uber Technologies Inc.'s China operation was battling Didi Chuxing Technology Co. more than a year ago, for example, Tencent, a Didi investor, blocked some of Uber China's service accounts on WeChat, its popular messaging app. Some online commentators excoriated Tencent for abusing its power. Uber sold its China operation to Didi last year.

Above all, there's their delicate relationships with the government. As I wrote earlier, once disrupters, China's internet companies are now part of the system. But still, they're private enterprises founded by ambitious men.

"The question is whether these companies will demand more say in things as they grow bigger," says Jingzhou Tao, managing partner of China practice at law firm Dechert LLP.

Mr. Tao points out that private ownership is increasingly at odds with the current political environment. The Communist Party is strengthening its command of state-owned businesses and building up its presence in private and multinational companies. "Will it come to a point that the party committee will take charge of private enterprises too?" he says.

For now, neither side is testing the line in the sand. The government knows these companies are important and globally known. The companies are being supportive of Beijing's goals. Alibaba's Mr. Ma recently traveled to America to talk up the benefits of China-U. S. trade, and Tencent's Pony Ma organized a forum on improving the competitiveness of Hong Kong, a former British colony, and the surrounding area.

Both sides are fumbling for "the best way to coexist," says an executive who has worked on government relations for decades.

Write to Li Yuan at li.yuan@wsj.com

(END) Dow Jones Newswires

June 29, 2017 05:49 ET (09:49 GMT)