Can Chinese Internet Companies Survive The Incoming ‘Cold Winter’? – Analysis


By Wei Hongxu

As the Federal Reserve accelerates monetary tightening, the investment environment across the globe has seen tremendous changes. Internet companies that were once the focus of the capital market are facing valuation adjustments as financing costs rise and future earnings depreciate. In the case of China’s internet companies, there is a dual impact of the unavoidable changes in the currency environment and major changes in the domestic internet market environment.

Researchers at ANBOUND point out that Chinese Internet companies have received huge virtual economic dividends during the COVID-19 pandemic, under the current changing situation, they have entered a new pattern of overall stock convergence. It is not exactly optimistic that these internet giants could survive the current economic winter, and more likely that the internet technology market will see some major shifts.

Globally, the internet technology industry as a whole is experiencing a shift of capital backflow amidst the Fed’s rate hike and it is no longer the darling of the capital market. Stocks of internet companies are being sold by investors as the Fed keeps raising interest rates. ANBOUND noted that as of October 27, among the five major Internet FAANG giants in the American stock market, Google’s market value evaporated by 66%, and its one-year market value fell by USD 1,274.4 billion. The company attributed this to the economic slowdown that hit advertising demand, causing its ad revenue growth to slow to 2.5% from 43% a year ago, while net profit plummeted 26% year-on-year, the slowest growth rate in 2013. Amazon’s market value has evaporated by USD 587.7 billion, a drop of 34%. Its latest third-quarter net profit margin is only 2%, a new low in recent years. While Netflix’s third-quarter results are dazzling with momentum for user growth, and key indicators have comprehensively exceeded expectations, its past one-year market value is still halved (-55%), with a loss of nearly USD 160.7 billion, Apple is in a better overall situation, though its market value still lost USD 60.3 billion, a slight drop of 2%. Amid the global economic downturn and the Fed’s tightening of growth, slowing growth and poor performance are becoming a norm for these tech giants.

When it comes to China, the situation is even worse. According to media statistics, by the end of 2021, the total market value of China’s listed internet companies was RMB 12.4 trillion, down 30.8% year-on-year. By the end of June 2022, the total market value of enterprises was RMB 10.9 trillion, and the market value of Chinese internet companies is expected to shrink further in October. According to data, overseas Chinese concept stocks, mainly internet companies, have entered a period of in-depth adjustment. From the beginning of 2021 to October 20, the overall average decline rate exceeded 50%. Both the Chinese tech giants Tencent and Alibaba have shrunk by more than 70% from their peaks. This means that the era of the capital-driven model during the boom of the internet industry has spelled its end. Now, internet companies have to rely on their own performance rather than capital bubbles to survive.

With the overall demand shrinking in the post-pandemic period, the development of China’s internet companies has encountered performance bottlenecks. In 2021, the net profit of listed internet companies in the country increased by 7.6% year-on-year, a growth rate that was lower than 37.3% in 2020 and 23.3% in 2019. The weakness of traditional core businesses has prompted these companies to increase investment in R&D. In 2021, R&D spending increased by 24.7% year-on-year, significantly higher than about 20% in the past two years. The latest data shows that in the first three quarters this year, internet business revenue and profits in China continued to decline. During this period, internet and related service enterprises above the designated size had a business income of RMB 1,099.8 billion, down 0.9% year-on-year, and the decline was 0.1 percentage points higher than that from January to August; the operating cost of internet companies increased by 3.9% year-on-year, a growth rate higher than that from January to August. The decline was 0.1 percentage points higher than that from January to August. The total profit achieved was RMB 96.6 billion, a year-on-year decrease of 8.3%, and the decline was 0.1 percentage points lower than that from the first eight months of the year.

The decline in the performance of internet companies can be attributed to the sluggish overall demand due to the economic slowdown. According to data from China’s National Bureau of Statistics, the national online retail sales in the first three quarters were RMB 9.59 trillion, a year-on-year increase of 4%. The growth rate has dropped significantly from previous years. This makes it difficult for internet companies that rely on e-commerce to grow their profits. On the other hand, the market expansion that previously pursued the number of users in China is facing the limit, making the market face stock competition. According to the China Internet Network Information Center (CNNIC), in 2021, the number of internet users in China was approximately 1.032 billion, and the number of mobile internet users was approximately 1.029 billion, exceeding 70% of the national population. The 2022 sinking market insight report released by QuestMobile shows that as of April 2022, the sinking market has 692 million monthly active users, accounting for 58.4% of the total. The emergence of market boundaries makes it more and more difficult for Chinese internet companies to seek incremental space.

Researchers at ANBOUND believe that the main reason for the rapid rise of Chinese internet companies in the past is the vast market space on the application side. Whether it is social media, e-commerce platforms, or new formats such as short videos and live broadcasts, they are all application scenarios based on the large-scale domestic market space. As far as the development model of domestic Internet companies is concerned, on the one hand, basic and original innovation in the country remains sufficient, mainly because technology imitates and builds digital application scenarios to meet massive demands. On the other hand, their development is basically driven by the international capital model that relies on huge market space and forms the dominance of a certain segment through capital competition. Therefore, under the circumstance that the market space is constrained and the consumption demand of residents is slowing down, Chinese internet companies now lack new application scenarios.

Meanwhile, China’s supervision policies continue to increase the requirements for data supervision. The penetration of internet companies into other fields is restricted by anti-monopoly measures, which in turn limits their further expansion into financial, and education training, as well as other consumer sectors such as medical care and travel. This has largely restricted the usage of internet companies’ data, and the lack of new consumption patterns has also put such companies in trouble. Taking into account the changes in the external policy environment such as the audit disputes between the United States and China, the policy constraints faced by Chinese internet companies have increased significantly, where policy boundaries have also been formed.

The penetration of internet technology in the consumer sector has created the rapid development of the industry and has also released new resources and efficiencies. However, in the new commercial application field, there are still huge challenges in terms of technical realization and market application. At the same time, the personalization of commercial and industrial application scenarios also makes it difficult to promote such a model on a large scale. This will cause the development of the internet to shift from a capital-driven mode to one that is technology-driven. Of course, in terms of application scenarios, there is still a huge market space in China. Whether it is commercial applications or general consumption, there is still the requirement for digital empowerment. Companies such as Huawei and Shein are actually exploring different fields to promote the transformation and upgrading of the internet industry with new models. This signifies that the innovation of the Chinese internet industry is faced with the intergenerational transformation of both investment and market models. It no longer takes capital and a single application model as the driving force but builds a new business model on the basis of technology-driven development to tap into the potential of industrial digitalization.

This kind of transformation also faces challenges for the tech giants, because this is not a simple capital game that can be achieved and solved. Some companies that still have advantages may stick to the fields they are familiar with and maintain the status quo, while others that cannot be changed will face difficulty in survival, and might even be eliminated from the competition, which their collapse would bring waves of shocks to the entire industry. Considering such circumstances, in terms of regulatory policies, it is no longer a matter of setting “green lights” and dividing the market but should be more about differentiated encouragement and support to avoid the fall of large internet companies in such a “cold winter”, as this could cause the collapse of the industry as a whole.

Final analysis conclusion:

The Chinese internet industry is now facing the shift of its capital-driven mode. It is also encountering a shrinking market caused by the lack of new application scenarios. These changes suggest that a generational shift in the internet space is taking place. If these Internet companies want to win the competition, they not only need technological breakthroughs to bring new industrial applications but also need to consider new business models, or else they may have difficulty surviving the incoming “cold winter”.

Wei Hongxu is a researcher for ANBOUND


Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

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