China's tech firms may be down but they are certainly not out
While investors are concerned about Baidu, Alibaba and Tencent's falling stock prices, the companies have been investing heavily for the future
At the start of the year, China’s largest technology companies known as the Bats - Baidu, Alibaba and Tencent - looked unstoppable. Things continued to go well for the big three throughout the first half of the year, with all of the firms’ share prices hitting record highs.
But since the summer, investors in the Bats have been tearing their hair out as stock prices began to fall, ruining the decent start to 2018. Collectively, the Bats have lost around $165 billion in value year-to-date - each for their own reasons.
US-listed Alibaba and Baidu have been caught up in the broader sell-off in Chinese stocks resulting from weak sentiment because of the trade war between America and China.
Tencent, meanwhile, has been hit by regulatory woes. The Chinese government has raised concerns about eye problems in the world’s second-largest economy, citing video games as one of the causes. Beijing suggested slowing down approvals of new games. Tencent makes a huge amount of money from games and concerns over the future of this part of its business has weighed on its stock.
Looking beyond the trade war rhetoric and short-term problems, the Bats certainly have enough firepower to have market leadership. They also pose a major challenge to major US tech names known as the Fangs: Facebook, Amazon, Netflix and Alphabet, the parent company of Google.
Just look at the growth and size of their businesses. Tencent grew 30 per cent year-on-year in the second quarter of the year, Alibaba increased revenues 61 per cent, while Baidu saw 32 per cent growth.
All of these businesses are expanding rapidly into new geographies and areas. Tencent’s massive games business continues to have traction despite regulatory issues and the giant also owns WeChat, China’s most popular messaging app with over a billion monthly users. Tencent is pushing WeChat Pay, the payments service that runs within WeChat.
Alibaba continues to grow its core commerce business, while Baidu, which has seen hits to its core search business, has been investing heavily in artificial intelligence and autonomous cars.
The Bats have also spent billions of dollars investing in other companies, to the point where they are not only technology firms, but investors too. Bernstein Analyst Bhavtosh Vajpayee recently dubbed Tencent the “SoftBank of China.” SoftBank is the Japanese firm that has its own $100bn Vision Fund, which it invests in big tech firms across the world.
While heavy investment could be seen as a negative by investors because it weighs on profits, it could also set these companies up for future growth. The investments made by the Bats could provide good returns in the event of an initial public offering or acquisition of these companies. Or the firms that the Bats have invested in could just be acquired by either one of them.
And perhaps the biggest factor working in their favour is the impenetrable nature of the Chinese market for the Fangs. Google has not been in the Chinese market since 2010 after it withdrew over concerns about censorship. Facebook is blocked, Netflix is not available and Amazon has a very tiny business in the country.
Even though recent reports suggested Google is looking to enter the market, the company will find it difficult to dislodge the dominance of Baidu. Amazon could find it a huge task to take on Alibaba. And Facebook will face an uphill battle getting its product to stick, particularly as Tencent’s WeChat is woven into the fabric of Chinese society. China still remains a huge opportunity for the Fangs but it continues to be out of reach.
With a home market of over a billion people, a push by the Chinese government into new technologies like artificial intelligence, and continued growth of digital services, the Bats may have taken a couple of hefty blows this year, but they’re certainly not down for the count.
Arjun Kharpal is a technology correspondent for CNBC in London
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Updated: October 2, 2018 01:40 PM