With the continuous strengthening of anti-monopoly and industry supervision in China, the country’s internet companies have suffered unprecedented blows. The financial reports of companies like Alibaba, JD.com, Tencent, and Baidu all showed a trend of declining profits and lower valuations. Tencent and Alibaba, the two largest Chinese internet giants, both reported the highest revenue in the third quarter. However, both companies have also suffered losses this year, which is their first losing record in the past 10 years. As the Chinese authorities continuously impose regulatory constraints, the disorderly expansion of the country’s internet companies has now been restricted and they no longer make money. In addition to the supervision policies, the flow economy on which internet companies rely is also reaching the tipping point of the market. This means that the development of China’s internet economy is at crossroads. They must not only seek new technological breakthroughs to create new development space, but they must also reconsider their development and profit models.
Under the overall economic slowdown and policy pressure, the growth of China’s internet economy is slowing this year. According to data from the country’s Ministry of Industry and Information Technology, from January to October, above-designated-size internet and related service companies in China generated RMB 1,310.2 billion in revenue, a year-on-year increase of 23.4%. The growth rate dropped by 2 percentage points from the previous three quarters, and the two-year average growth rate was 18.1%. From January to October, internet companies achieved operating profits of RMB 117.4 billion, a year-on-year increase of 21.3%, an increase of 4.5 percentage points over the previous three quarters, and an average growth rate of 14.9% in the two years. At the same time. operating costs increased by 20.9% year-on-year, and the growth rate dropped by 3.7 percentage points from the previous three quarters. It should be noted that the growth rate of R&D expenses has dropped as well. From January to October, internet companies invested RMB 58.79 billion in R&D expenses, which was a 2.6% year-on-year increase due to a higher base in the same period last year, and the growth rate dropped by 9.3 percentage points from the previous three quarters.
As things stand, the current situation suggests that China's internet economy is entering a transitional period. This is not just due to the Chinese government's anti-monopoly supervision of internet companies, but also the fact that internet companies themselves are still in the process of reorganization and are not seeing an obvious breakthrough in technology or development direction. This not only affects the future of the internet economy but the entire economy as well.
It is also worth noting that, as a result of the pandemic's rapid expansion, began at the end of last year with the suspension of Ant Group's listing, internet companies are facing a comprehensive policy tightening. These companies have shifted from disorderly growth towards a more standardized and orderly direction. The gradual formation of anti-monopoly policies, as well as industry policies related to education, medical care, and finance, indicates that a new market order for the virtual economy is gradually taking shape. Companies such as Ali and Meituan have been heavily penalized, indicating the impact of policy boundaries.
Market wise, the expansion momentum of internet companies in the consumer sector has begun to encounter bottlenecks. The ongoing rise in internet traffic flow’s costs and advertising costs contributes to these companies' increased eagerness to convert their own "internet traffic" into assets and benefits, resulting in the disorderly expansion to various fields. Under these constraints on expansion and penetration, the model that relies on massive spending to occupy the market, as well as the disorderly expansion of high investment to generate traffic and profit, has also encountered obstacles. This only caused these internet companies to experience losses. More internet companies are also facing the bursting of the bubble and can no longer raise funds from the capital market, thus falling into a "development panic".
Of course, from the perspective of the general trend, as the global economy becomes increasingly "virtualized", there is still a lot of room for digital technology and new models to help the real economy become more efficient. As far as China is concerned, the scale of China's digital economy will exceed RMB 40 trillion in 2020, accounting for 40% of its GDP. Therefore, with the continuous advancement of technology, the internet economy still has huge potential. Driven by the rural revitalization policy, the consumer sector still has a broad market space in rural areas and underdeveloped areas. The industrial internet is in its infancy in the service sector of enterprises and institutions, and will also bring digitalization to the industrial sector. In addition, the huge demand in business services and government services that emerged during the pandemic has also brought opportunities for the development of internet companies.
All in all, the future development of internet companies and internet platform still needs to return to the foundation of technology, and utilize digital industrialization to drive the digitization of the industry, thereby forming a sustainable development model. Although from a policy point of view, China has strengthened its anti-monopoly of internet companies, which in the long run is actually about maintaining a normal market environment, not about curbing the future of internet companies and the internet economy per se. In fact, the strengthening of the supervision of internet companies is mainly aimed at the disorderly expansion of these companies. This model of relying on capital to quickly promote enterprise growth and occupy the market not only has an impact on specific industries and fields but also exposes them to huge financial risks.
Judging from the current trend, despite the pressure of a long-term slowdown in the Chinese economy, there is still rapid development in the growth of the internet economy, which shows that the actual restrictions on monopolistic enterprises have brought more innovation and growth, and are indeed conducive to the development of the entire internet economy or digital economy ecology. Therefore, the most important thing for these companies is to change the business and profit models, so as to avoid continuous engagement in new business operations with the existing model of "winner takes all".
Final analysis conclusion:
Faced with the gradual clarity of policy and market boundaries, the development of internet companies and the internet economy in China requires not only new technologies and market space but also changes in development and profit models.
