Alibaba Regains Its Most Important Advantage, but This Time Is Different

The company will be under government regulators' close supervision, undermining its ability to innovate and grow

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Panos Mourdoukoutas
Apr 13, 2021
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Alibaba Group Holding Ltd. (

BABA, Financial) has regained its most important advantage cozy relations with the Chinese government. However, this time things are different.

For years, Alibaba has enjoyed a dominant, Amazon.com Inc. (

AMZN, Financial) style position in the world's largest e-commerce market thanks to a close relationship with the Chinese government.

Alibaba's Taobao site, for example, beat eBay Inc. (EBAY) in China back in the early days when Alibaba was a startup and eBay an industry giant thanks to the government support. They also helped Alibaba expand to internet banking, an enormous opportunity in a country where the government owns most banks.

Both Amazon and Alibaba benefited from their near-monopoly positions in e-commerce in their respective home markets, which helped them rise in global markets. In fact, Alibaba is beating Amazon in two critical metrics, revenue growth and operating income.

Company

Alibaba

Amazon

Gross profits

$230 billion

$152.76 billion

Three-year revenue growth (%)

45

28

Three-year Ebitda growth (%)

38.1

45.2

Operating income growth (%)

16.45

5.93

Company

ROIC

WACC

ROIC-WACC

Alibaba

9.22%

6.39%

2.83%

Amazon

12.4%

7.97%

4.43%

Nevertheless, Alibaba ran the risk of losing this advantage back in December when the Chinese government launched an investigation into its anti-competitive practices. That is an indication of Beijing's determination to curb the country's ever-expanding internet monopolies.

Good relations with regulators are essential in every country. They are even more critical in China, where the government is the economy's gatekeeper, and it has much greater power than the U.S. to decide who will be in what business and for how long.

Government opposition can break industry giants as quickly as it made them. That's what appears to be the case with Alibaba. One prime example of this is how back in November, Chinese regulators spoiled the company's plans for Ant Group's initial public offering.

A week later, the State Administration for Market Regulation launched an antitrust investigation into Alibaba's practices, sending its shares sharply lower.

The situation changed this week as a $2.8 billion fine by regulators and a conciliatory statement on both sides appear to have restored the relationship between Alibaba and the Chinese government.

At least, that is the impression of financial markets, which sent Alibaba's shares sharply higher following the announcement.

Still, Wall Street may be missing parts of the settlement that make things different this time around. Alibaba and its Ant Group subsidiary will be under government regulators' close supervision, undermining its ability to innovate and grow. Investors should temper their enthusiasm for Alibaba shares.

Disclosure: No shares.

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I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.