When scientist Wang Jun left BGI, among the largest genomics organisations in the world, to establish iCarbonX, his latest medtech venture, in Shenzhen well over a year ago, many early local investors vied to offer him capital.
They were led by Neil Shen of Sequoia Capital China, arguably the most impressive venture investor in China. But ultimately Mr Wang decided to take money from the social media and gaming company Tencent Holdings. He says he decided to take Tencent’s money in part because the $200m he received came with a valuation for the new company of $1bn, and in part because of the power of Tencent’s WeChat platform, which makes every one of its 900m users a potential client or source of data.
Not long ago, “princelings” such as former president Jiang Zemin’s grandson Alvin and premier Wen Jiabao’s son Winston, and other private equity investors, were the dominant players in China’s financial landscape. They had access to the best deals and garnered the highest returns. Then it was the turn of venture capital firms to accrue the big gains. But today they too are being eclipsed; nobody can compete against Tencent and its counterpart, Alibaba.
How good, though, is that duopoly for either the country or the business landscape in the long run? As the two evolve from being ecommerce and mobile app companies to massive investment firms whose capital is cheaper than anyone else’s, they are able to use their monopoly positions as both carrots and sticks.
“Tencent and Ali used to be the face of innovation in China,” says one venture investor who took stakes in JD.com and Tencent relatively early in their lives. “Now they have become an obstacle to innovation.”
Even Silicon Valley doesn’t have a comparable concentration. To many Chinese the situation is more akin to the market power exercised by Microsoft in the 1990s, and then only remotely so. The Fangs (Facebook, Amazon, Netflix Google) certainly dominate the tech landscape in Silicon Valley. But the culture of investing in, copying or killing your rival (or doing all three) is largely absent there.
At the heart of the market power of the two Chinese internet giants is the cheap capital they can access given their respective market caps — now about $400bn each. That clout enables them to take stakes in virtually every start-up on the mainland, even if the entrepreneur involved is reluctant to take their money and sell either (or both) a stake. Thanks to the dominance of Ali and Tencent, young firms will either be squeezed out or bought out.
Today, the two companies alternately clash and collaborate across a range of spheres including entertainment, logistics, payments, big data and increasingly healthcare.
“Three years from now,” predicts one prominent venture capitalist, “90 per cent of Chinese people will use either WePay [now Tenpay] or Alipay, they will sign up for Tencent or Alibaba Cloud, they will get their news from either WeChat or Weibo [now in effect controlled by Ali] and if they need funding they will take it from Ali or Tencent.”
To be sure, there is an anti-monopoly law in China but “so far it has been directed more against foreign companies when they try to buy Chinese firms than against domestic firms like these two companies,” says Chen Zhiwu, a professor at Yale University’s school of economics and finance. “The regulators are not doing a good job; they don’t use their muscle.”
In the US, there are limits to the power of even the wealthiest tech companies, partly because of the protection of intellectual property and antitrust regulations embodied in rules such as the Clayton act. There is no such tempering influence in China to constrain Alibaba and Tencent.
China’s winner takes all culture is great for these two. But it is far less great for China as a whole.