Chris Keall: China’s Ant problem


Beijing’s move to squash Ant Group’s IPO illustrates a larger problem for China.

We all know that Guangzhou is the world’s factory, and that China is that master of cheap manufacturing.

But to become a true powerhouse, China has to do better in areas like intellectual property protection, innovation and entrepreneurship – all of those “soft power” elements you find higher up the economic food chain, but many of which jar with an authoritarian regime.

Outgoing US President Donald Trump made hay complaining that Apple made iPhones in China, not the US.

And it is true that a Chinese company (Foxconn) assembles most iPhones – simply because Americans are never going to live in a cot onsite, and tumble out of bed at 2am to rapidly retool a production line because Tim Cook has had a last-minute change of mind about the trim on a model.

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But contract-manufacturing will always be low-margin business (Foxconn made a 1.76 per cent profit margin in the second quarter). The soul of Apple’s products – R&D, innovation, design, marketing, software development and services like the App Store and Apple Pay – are all controlled out of the US, which is where all the value is found (Apple is the most profitable company in the world).

China’s government likes control, censorship and conformity. The US – or, at least, its tech and venture capital powerhouses of San Francisco and neighbouring Silicon Valley – has been open to the unruly mix of drop-outs, immigrants, rule-breakers, rebels and crazies required to create great companies, and develop intellectual property breakthroughs and new ways of doing business.

There has been some progress. After a stuttering start after it got into legal trouble after being accused of copying code from US company Cisco (the case was settled out of court), Huawei has recently been a leader in 5G patents – although its very success has brought it into the political crosshairs.

And, notably, China has been something of a fintech and e-commerce pioneer, with mobile and social media apps being used as alternative payment systems.

Which is where we came in.

Ant Group, spun out from Jack Ma’s Alibaba, has used the power of the internet to disrupt China’s state-owned banks. It began in payments, but then expanded into small loans – extending them to some 500m customers as it used the internet to skirt the long-time status quo.

With its November 5 float, which involved a dual listing across Shanghai and Hong Kong, it was set to raise more than US$34 billion – which would have made it the world’s largest IPO. At a total market cap of US$316b, Ant would have been worth more than all of China’s existing major banks combined.

But it was not to be.

Beijing stepped in and suspended the IPO – nominally, to “better maintain the stability of the capital markets and to protect investors’ interests”. It has been postponed for at least six months. If it does go ahead, Ant will be wrapped up in much tighter regulation.

“The Communist Party is pushing back,” Duncan Clark, author of the 2016 book Alibaba: The House that Jack Ma Built, told the FT.

“It is showing its disinclination to allow entrepreneurs out of their lane.

“Commerce is one thing. Finance is clearly another. Jack has embraced the power of the internet to supercharge the private sector but applying this chemistry to the financial sector is on another level it seems.”

It’s no wonder that Ma – one of the few on the Chinese tech scene to show genuine flair – chose to list Alibaba on the New York Stock Exchange.

He should get a bit more love at home.

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