Alibaba gives crash course on government relations

January 29, 2015

By John Foley 

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Alibaba is teaching its shareholders a useful lesson about Chinese business: there’s no such thing as having a good relationship with the government. The company’s shares fell 4.4 percent on Jan. 28 after a regulator lambasted its sales habits. Alibaba says the State Administration for Industry and Commerce (SAIC) is being irrational. That is little comfort to investors who are now $11 billion worse off on paper.

China’s biggest e-commerce group got that way partly by managing its government connections. Founder Jack Ma dutifully throws around political buzzwords like “reform” and “new normal”, while emphasising how the company supports millions of jobs. Without skillful handling of China’s favour-based system Alibaba could never have grown to its current $245 billion size. Premier Li Keqiang has praised Alibaba’s “Singles Day” sales festival – an event SAIC now claims misled consumers.

While SAIC doesn’t seem to be threatening penalties, Alibaba has two battles to fight. First, it must convince investors that it did not know the regulator was planning to criticise it publicly after the two sides met last summer. Failing to disclose such price-sensitive information ahead of last September’s initial public offering could provide grounds for shareholders to sue. Making public the details of recordings Alibaba made of the meetings might help.

At the same time, however, Alibaba must prevent its beef with the regulator from escalating, which might happen if the company’s response is too muscular. SAIC’s powers are theoretically large – it can even suspend key licences Alibaba needs. Other regulators may join in. Many are under pressure to prove their worth as costs are cut and graft gets stamped down. SAIC’s account of how its finger-wagging woke Alibaba from its “complacent state” reads like an exercise in self-justification.

Even if Alibaba can mend these fences, investors have received a reminder that China’s state machinery is the opposite of homogenous. Instead, it’s contradictory and often value-destructive, with numerous egos and inconsistent rules. As if to emphasise that point, SAIC’s complaint was no longer accessible on its website the day after it was released. If there’s a lesson for shareholders, it’s not that regulators will clip a company’s wings, but that persuading them not to is a costly and never-ending battle.

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