‘Distorted’ private tech market valuations to see correction in next six to nine months, says Alibaba’s Joe Tsai

“Entrepreneurs [in China] had it too easy raising gigantic billion-dollar rounds of capital and multibillions in valuation,” said Tsai, in a dialogue session at a Thomson Reuters Breakingviews Predictions 2019 event on Friday. “[A correction] will happen and it’s healthy.”

Tsai’s remarks have come as technology stock prices around the world took a hammering in a sell-off that started in October last year amid economic uncertainty and an escalating US-China trade war.

Chinese companies that went public last year, such as smartphone maker Xiaomi Corp and on-demand local services giant Meituan Dianping, are currently trading well below each firm’s offer price.

Similar to the declines seen by Chinese internet peers Tencent Holdings and Baidu, e-commerce giant Alibaba Group Holding saw its share price fall about 25 per cent from a peak of about US$210 in mid-June. The New York-listed company, which owns the South China Morning Post, currently trades at about US$156.

In the Thomson Reuters session, Tsai also indicated a bubble in China’s bicycle-sharing sector, which at its peak saw more than 30 companies competing in the country and billions of dollars invested in these start-ups.

Alibaba-backed Ofo, the bike-sharing start-up that at one time was one of the dominant players in the market, raised US$2.2 billion from investors. At present, Ofo is facing a cash crunch and has been slapped with multiple lawsuits from suppliers demanding to get paid.

“We went into [Ofo] because we felt it was an important use case for our [financial affiliate] Ant Financial [Services] … for payments, and in establishing a trust rating so users do not need to put a deposit down,” Tsai said.

“In the case of Ofo, we had a number of shareholders that had different strategic interests in the capital table,” he said. “When those shareholders with different interests can’t agree with each other, the entity that suffers is the company.”

Other topics touched by Tsai in his talk follow:

On remedying China’s economic slowdown:

“My personal view is that the old days of just turning on the liquidity and using monetary policy to grow the economy is not going to work. There is a lot of capacity built up in China already.

The place to focus on is fiscal policy. Specifically, cutting taxes for small businesses and individuals, to put money into people’s pockets so they can start to spend. Fiscal stimulus will be a big help in the form of tax cuts.”

On the US-China trade war:

“The trade war won’t end. The trade deficit will structurally correct itself because of 300 million consumers in China that want to buy all over the world, including the US.

Chinese president Xi Jinping in November talked about the next 15 years, on how China is going to import US$30 trillion of goods and US$10 trillion in services. That’s a gigantic number. So that trade deficit problem willl take care of itself.

[The trade war] is an effort by the current US administration to contain the rise of China, and that’s a long-term problem, not a short-term issue.

It might have started with President Donald Trump focusing on the trade deficit itself, and therefore using tariffs to correct it. But over the course of the last nine months, it was blown into a much bigger anti-China problem.

If there are bad relations between China and the US … the two largest economies in the world [are] symbiotic and if the relationships are bad, the global economy is going to suffer.”

On Alibaba’s investments in the US:

“The Committee on Foreign Investment in the United States (CFIUS) review process made it difficult for Alibaba and other Chinese companies to make investments in the US. So for the time being, we have to look at other parts of the world, and that’s life.

If you look at the last five years, the capital that Alibaba and Ant Financial have allocated to mergers and acquisitions are mostly, 90 per cent inside China. The non-China component is really at the margins, and not the core. We use those acquisitions to complement some parts of our business.

Because of the [blocked deal in] MoneyGram and the new CFIUS regime, it is pretty clear that those alternatives are shut off now.”

On whether the world could think about Alibaba the same way it thinks of Huawei Technologies today:

“As a senior executive in a company, you have to assess all risks. Although that may be a possibility, what Alibaba is doing in the US is to help small businesses and farmers … sell on our platform so that Chinese consumers can buy more from them.

I don’t see how that could become a reason for the US government to target us.

I think what the American government and together with the Five Eyes alliance, what they’re trying to do with Huawei is unfair. There is a political agenda behind it.

But there is a distinction between a product and a service company. We are mainly a service company, and we help constituents in the Western world access China. It’s easy to say, ‘you make a product and it’s not safe’, and unfortunately Huawei falls in that category. I think it’s extremely unfair [to Huawei] and very politically motivated.”