Can China's Tech Giants Do Without Consumers?

8/18/2024 7:00:34 PM

(MENAFN- Live Mint) earnings reports from Chinese tech companies last week should be a wake-up call for Beijing.

Alibaba Group Holding
Ltd. and JD
Inc.
pulled out all the stops to attract customers to spend during their
618
shopping festival, a Black Friday-like extravaganza that took place during the quarter ending in June. They offered
steeper-than-ever discounts on everything from iPhones to loungewear, enlisted
A-list celebrities like Rihanna to promote products, and even experimented
with a digital avatar of an executive to hawk goods over livestream. But
Alibaba's
revenue from its core e-commerce platforms fell by some 1.4%, and retail revenue at JD, which offered some of the most cut-throat markdowns, ticked up by 1.5%.

Despite slashing prices and launching some of their most aggressive campaigns, it wasn't enough to get Chinese consumers to dig into their pocketbooks. This may not come as a total surprise
as the nation is still dealing with a struggling economic environment
marked by a prolonged housing slump, and high youth unemployment.

Tencent Holdings Ltd., meanwhile, reported strong profit growth that beat analysts' expectations. But this was driven by the release of its smash-hit game Dungeons & Fighter Mobile
in May. The fact that China's most valuable tech company's revenue was buoyed by its gaming unit is another red flag for the broader economy. Spending on digital entertainment has historically been counter-cyclical, meaning consumers will continue to shell out on this even while paring back on bigger purchases. Unemployed workers may also spend more time gaming.
And it's unclear if Tencent will be able to translate the one-time release of DnF Mobile
into sustainable business growth.

There may only be so much these companies can do to lure the wary consumer in this environment. As e-commerce struggles and macroeconomic headwinds loom large, they should start focusing more on innovation and alternative ways to earn revenues.

Chinese tech firms may look to invest heavily in artificial intelligence, despite
unique challenges. Tencent and Alibaba have made significant bets in AI, but it's not clear that these are paying off yet.
Tencent executives noticeably spoke very little about AI during their post-earnings call with analysts, saying the company would leverage this technology where it sees“tangible commercial results.” One area where AI is showing promise for Tencent is in helping with content recommendations, which keeps users engaged on its video and social platforms. It is also using the
technology to improve targeted advertising. Tencent seems to be playing the long game when it comes to AI, and is wise to focus on how to use it to drive profits instead of trying to follow the hype.

Alibaba's AI-related product sales growth was in the triple-digits, and revenue from its Cloud division grew about 6%.
But this was in part boosted by Olympics contracts. Cloud growth“might not be sustainable, given rising corporate uncertainty and the ongoing price wars” in China's cloud and AI sectors,
Bloomberg Intelligence analysts noted. But Alibaba executives said during the analyst call that they don't expect enterprise demand for AI products to be hampered by macroeconomic conditions, and any business that relies on digitalization“has to be investing in AI.”

Chinese tech firms are
already facing an uphill battle
when it comes to AI because of Washington-imposed curbs on advanced chips and equipment. And investors globally are beginning to question how the massive investments in AI will eventually pay off. Put together: It doesn't seem like AI will turn into an immediate lifeline for China's beleaguered tech firms, but these investments are at least a step in the right direction as they rely mostly on enterprise clients and not just the spending of individual consumers.

Another option in the face of domestic struggles is for Chinese e-commerce companies to pursue more revenue streams
overseas. This has played out well for Alibaba and JD's rival PDD Holdings Inc., the parent company of Temu. PDD's expansion recently helped founder Colin Huang become the
richest man in China.
At the same time, competition is becoming increasingly crowded, with even US giant Amazon Inc.
planning to launch a discount web store with goods shipping directly from China.
It will be very challenging for Alibaba and JD to compete here, and there is only so much price-slashing they can continue doing.

Ultimately, it will be very hard for these marquee tech companies to grow without domestic conditions that restore consumer confidence. The Chinese government has made great strides in recent years in reducing regulatory uncertainty with the thawing of its crackdown on the tech sector. But if Beijing wants to support a real recovery for its pioneering e-commerce firms, and the broader economy, it needs to start implementing policies that boost consumer spending.