China Tech Giants Tumble as Resurgence Spurs Fear of a Price War

(Bloomberg) — China’s internet firms are revving up efforts to outdo each other since Beijing began to wind back its bruising internet crackdown, spurring an abrupt surge in competition that’s threatening margins and spooking investors.

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A battle is brewing as companies that laid low or sought to limit expansion during the years-long crackdown now feel the shackles coming off. Beijing’s hasn’t sanctioned a return to the free-for-all that marked the sector’s pre-Covid heyday — but a flurry of aggressive campaigns announced by Big Tech in recent weeks is reviving the specter of debilitating price wars.

E-commerce leader JD.com Inc. slumped more than 8% Tuesday after media reports it was planning a 10 billion yuan ($1.5 billion) subsidy campaign to compete against rivals like PDD. Meituan is said to be expanding into Hong Kong and has embarked on a campaign to hire 10,000 people on the mainland — an effort to beat back heightened competition from new entrants such as ByteDance Ltd. in the $145 billion Chinese food arena.

Away from online commerce, NetEase Inc. and MiHoYo are upping their battle against gaming leader Tencent Holdings Ltd., while search-engine operator Baidu Inc. is rolling out a new chat service based on artificial intelligence to try and wrest ad revenue away from the likes of Alibaba Group Holding Ltd. and Tencent.

Read more: China Tech Giant Meituan Hires 10,000 to Counter ByteDance

The rush of initiatives come after Beijing appeared to grow less stringent in recent months in efforts to curb the industry’s influence. While the growth plans caused a run-up in a number of shares, they also come with broader risks: intensifying competition has the potential to severely depress profit margins.

That concern is weighing on tech shares. The Hang Seng Tech Index has dropped more than 10% from its closing high for the year set in January. The gauge slipped as much as 3.7% Tuesday, and posted its lowest close of the year. Among the sector’s biggest stocks, Alibaba and Tencent both fell more than 4%.

“They are willing to invest and compete again after two years of being cautious and cost-cutting,” said Vey-Sern Ling, managing director at Union Bancaire Privee in Singapore “The companies are optimistic about China’s consumption outlook and normalization of the regulatory environment” but subsidy-based competition is negative for the entire e-commerce industry, he added.

JD.com led losses Tuesday following the reports of its subsidy campaign, which is aimed specifically at competing against budget shopping app Pinduoduo. The stock plunged the most in four months.

“Embarking on an aggressive subsidy campaign could be an acknowledgment on JD.com’s part that it is facing market share pressure from Pinduoduo,” said Ling at Union Bancaire Privee.

The offensives to lure cost-sensitive consumers also suggest internet leaders’ superiority in elements such as logistics aren’t proving enough to thwart competition from newer entrants and smaller players.

What Bloomberg Intelligence Says

The glory days of Tencent’s domestic games business may be a thing of the past. Gaming was once the engine of Tencent’s earnings growth. While 2023 looks to be a better year for the Chinese gaming sector, we believe there has been a structural shift in the market. We expect Tencent’s domestic gaming sales to remain broadly flat through 2024-26.

– Robert Lea and Tiffany Tam, analysts

Click here for the research.

–With assistance from Edwin Chan and Jeanny Yu.