Cover Story: Malaysian tech companies and the Alibaba effect

This article first appeared in Digital Edge, The Edge Malaysia Weekly, on May 10, 2021 - May 16, 2021.
Cover Story: Malaysian tech companies and the Alibaba effect
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The Chinese government’s reaction to criticisms from Alibaba Group Holding Ltd founder Jack Ma has raised questions about its influence on business and whether Malaysian companies that have partnered with Chinese giants are vulnerable in any way.

Last October, Ma publicly criticised Chinese regulators at Shanghai’s Bund Summit, averring that they were stifling innovation and operating with a “pawnshop mentality”. A month later, the Chinese authorities pulled the plug on the initial public offering of Alibaba’s financial technology (fintech) arm and affiliate Ant Group. And last month, they slapped the group with a record fine of RMB18 billion (RM13.38 billion) for “monopolistic practices”.

Many online news commentaries suggest that this chain of unfortunate events is the high price Ma has to pay for challenging Chinese regulators. While correlation may not necessarily mean causation, it is essential to note that more than half a dozen other wealthy Chinese business elites have also vanished from public view and when they reappeared, they were mysteriously in government custody with charges of corruption or embezzlement. 

The “Chinese Warren Buffet” Guo Guangchang, founder and chairman of Fosun International Ltd, and billionaire fashion designer Zhou Changjian, for instance, vanished from public life in 2015 and 2016 respectively, with no explanations forthcoming. 

In March last year, real estate mogul Ren Zhiqiang went missing after publishing an online essay criticising the Chinese government’s handling of the Covid-19 pandemic. He has since been expelled from the ruling Chinese Communist Party (CCP) and sentenced to 18 years in prison for taking bribes and misusing power. His supporters claim he was punished for speaking out against the CCP.

At around the same time as the anti-trust crackdowns on Alibaba, other technology companies such as Tencent Holdings Ltd and Didi Chuxing Technology Co were fined for violating anti-monopoly rules as well. 

This is in stark contrast to the relative lack of anti-monopoly investigations into Chinese state-owned enterprises (SOEs). For instance, the Industrial and Commercial Bank of China is the world’s largest bank in terms of assets. 

SOEs such as China Mobile, China National Petroleum Corporation and the State Grid Corporation of China dominate the economic landscape in their respective industries to a great degree. In fact, the Chinese government endorsed the merger of state-owned chemical giants Sinochem and ChemChina late last year.

Digging deeper, the CCP’s influence over the private business sector is ingrained into the nation’s laws and regulations. Article 30 of the CCP Constitution requires a CCP cell to be formed in any company where there are three or more CCP members. Article 19 of China’s Company Law requires that every company establish a CCP cell, carry out CCP activities and provide necessary conditions for CCP cell activities.

CCP cells are small committees of CCP members within a given organisation. The party constitution gives these cells the vague responsibility of serving as the communication bridge between the organisation and the party itself. The cells are also tasked with party recruitment, educating party members and reporting any illegal activities observed.

For the past few decades, this requirement for CCP cells to be established has not been strictly enforced in the private sector. According to a 2019 document from the All-China Federation of Industry and Commerce, only 27.42% of private companies had CCP cells in 2002. However, the figure had increased to 48.31% in 2018.

On Sept 15 last year, the General Office of the Central Committee of the CCP issued an opinion piece calling on the nation’s United Front Work Departments (UFWDs) to increase CCP ideological work and influence in the private sector. UFWD is an intelligence department that gathers information, manages relations and attempts to influence elite individuals and organisations inside and outside China.

All of this is relevant to businesses here as China has been Malaysia’s largest trading partner for the past 12 years, according to the Ministry of International Trade and Industry (Miti). Exports to China represented 16.2% of Malaysia’s total exports in 2020 and had risen by 12.5% year on year.

Many local businesses have established long-term and strong business relationships with Chinese corporate entities. Despite the negative press China has received from Western media over the actions highlighted, conversations with experts and local businesses paint a significantly different picture of what it is actually like working with Chinese companies.

Weighing opportunities and risks

Aemulus Holdings Bhd, which specialises in semiconductor testing equipment, for instance, has formed a joint venture (JV) with Chinese company Tangren Microtelligence Co Ltd to establish Tang Ming Sheng Shi (Jiashan) Technology Co Ltd (TMSS). 

Aemulus founder and CEO Ng Sang Beng tells Digital Edge that the JV agreement was signed in April last year and TMSS was officially established and registered in China by October. 

Through the JV, Aemulus’ business operations will be handled by a local entity, which lowers the barrier to entry and cost of doing business in China. The JV also falls in line with the Chinese government’s objective of achieving a 70% semiconductor self-sufficiency rate by 2025.

“We thought that setting up a company in China would take a long time, but it was quicker than expected. As far as the business is concerned, we are happy with the progress and we feel that the barrier to entry in China has been significantly lowered. That is why we chose to participate in the Made in China 2025 ecosystem,” says Ng.

He acknowledges that when setting up TMSS, Aemulus came up against the clause requiring the JV company to set up a CCP cell. Although it did so, the CCP advisers are not directly involved in the day-to-day management of the business and have not caused any disturbance in the company so far, he says. That is why he does not believe that the political scene in China is a major cause for concern to companies such as his.

“For the private sector in China, the government does not have the resources to monitor as many companies as you would think. Due to the population size and the sheer number of companies there, I do not think it is able to track each and every one of them,” says Ng.

“I can’t really speak on behalf of the industry we are in, but I believe the Chinese government has no intention of disrupting the business landscape in China. The CCP is in fact pro-business, pro-economic development and always thinking of ways to grow the economy.”

He stresses, however, that he is not pro-China and he believes that no country is perfect; each has its own strengths and flaws.

Regarding the tussle between the US and China, Ng believes there is little point in bringing up the moral compass argument. While China has received flak over its actions, there are rising social issues on both sides, such as the increase of Asian hate crimes and white supremacist movements in the US. When it comes to business, however, he believes that China is still a good place to be.

“Two years ago, when former president Donald Trump imposed a ban on Huawei, we received a call from a Chinese customer asking if we would still be able to continue selling to them and whether our product origin is Malaysia. We said yes, and that was how [our involvement with China] started,” he says.

“The more I researched China, the more business opportunities I found. China imports about US$300 billion of semiconductor chips and US$210 billion of them will be replaced by domestic manufacturing due to the Made in China 2025 initiative.

Woo: In a way, the Chinese Communist Party wants to have a standard template for all companies to have CCP cells, regardless of ownership (Photo by Bloomberg)

“For every US$1 million worth of chips produced, the manufacturer requires about four times the investment in equipment, factories, wafers and assembly houses to produce it. We are now talking about US$840 billion being spent until 2025. The market potential here is huge, and the data tells us that money can be made here.”

Ng points out that it is important to factor in both foreign political opportunities and risks during the decision-making process — a risk assessment that should be familiar to most business owners.

“As long as you do not break the rules of the country, there is no need to be worried about the regulator. Regarding the Alibaba case, Jack Ma is a very innovative and daring character. But he also made the decision to operate in a grey area, monopolising the industry and buying up competitors.

“Historically speaking, businesses in China tend to do very well when the government does not impose many regulations. However, that is in the past and is no longer the case now. Putting politics aside, if you look at the Chinese government purely in its capacity as a regulator, it is actually doing the right thing by regulating the industries that need regulating.”

Ng points to China’s fintech industry as an example. In December 2020, digital financial service providers such as Ant Group, Baidu and Tencent removed their deposit-taking products from their platforms to comply with the tightening regulations on the industry. The high interest rates on these products tend to reach the upper limits of the central bank’s guidelines, and they have low thresholds for accepting customers, with many requiring as little as RMB50 to start an account.

According to Reuters, these non-bank fintech players have captured a large segment of China’s consumer loan market, with some analysts estimating their market share at about 30% of the entire RMB14 trillion industry. These non-bank lenders rely on traditional banks to provide credit to borrowers, but still operate outside the formal banking system.

“I visited China in 2007, and back then there were banners warning vehicles not to speed. As pedestrians, we had to watch where we were going. But I can tell you that it took them only a year or two to cut down on speeding cases significantly,” says Ng.

“China is a country that makes things happen for the good of the majority. To use Alibaba as a case study to reference how the Chinese government treats the private sector may not be an accurate representation.”

In terms of the ease of doing business there, he says the bureaucratic process of setting up his JV company was part of the adaptive process of assimilating to the new foreign environment. However, it is essential for business owners to get their boots on the ground in China and be prepared to stay there long term to truly comprehend the business culture and values, he points out.

Context matters

Regarding the Western media’s negative portrayal of China’s actions towards the private sector, the Jeffrey Cheah Institute (JCI) on Southeast Asia president Dr Woo Wing Thye says context matters. 

“First, it is important to know that the laws in China have changed since the 1970s to allow the development of a private sector. Before that, there was no legally recognised private sector [due to the communist ideology].

“However, the private sector still existed. Therefore, while these companies register themselves as collectively-owned enterprises, their origins were not strictly legal to begin with. Hence, they suffer from what we call ‘the original sin’.”

A Stanford University study refers to the “original sin” as the private taking of state assets and the lack of clarity in ownership of private property rights. This is because the owners of private businesses are unable to explain clearly the origin of accumulated wealth.

Woo further explains that these companies were used to operating in a wild-west environment ungoverned by rules or regulations. The Chinese government used to turn a blind eye to actions not explicitly permitted. These companies were able to get away with things that were not strictly legal and hence, formed some bad habits.

Such ignorance gave rise to corruption, which ultimately corrodes the legitimacy of any government, says Woo. The CCP takes corruption very seriously because not only does it affect the efficiency of the functioning system, it ultimately has to do with social and political stability in the country.

“Second, the resurgence of the state sector did not begin with Chinese President Xi Jinping, but former president Hu Jintao. Larger and larger portions of bank loans went through state enterprises during the Hu era, and what Xi has done is a continuation of that trend. The setting up of party committees in private enterprises also started before Xi’s time,” he adds.

“In a way, the CCP wants to have a standard template for all companies to have CCP cells, regardless of ownership. Unlike state enterprises, the party committee inside private enterprises was not given operational dominance over the management or business owner, and is unable to override their decisions.”

For Malaysian companies, one of the biggest causes for concern could be the Chinese government paying particular attention to money laundering, says Woo. Any company involved in facilitating Chinese investments in Malaysia would require stricter oversight due to the CCP’s efforts to crack down on corruption.

Although he did not cite any Malaysian firms involved, he warns that the Malaysian real estate industry is a possible outlet for the Chinese outflow of questionable money with dubious origins.

Apart from that, Woo says the policies with the most direct impact on Malaysian firms would be the establishment of CCP cells in the companies set up in China. However, he highlights that Malaysians are not required to join the cells, which would most likely be occupied by Chinese employees who are members of the party.

“Malaysia is not seen as a country that is hostile to China. After all, it is like our big brother who takes care of us,” says Woo, referencing the recent controversial statement made by Foreign Minister Datuk Seri Hishammuddin Hussein, who used the term “big brother” during a joint press conference in that country and later clarified that he was referring to his Chinese counterpart Wang Yi rather than China in relation to Malaysia.

“I doubt that the Chinese are interested or evangelical about propagating Communism as an ideology. They are doing it as an example of how they manage their own country. Instead of building Communist institutions all over Southeast Asia, they are building Confucius institutes instead,” he adds.

Wedged between the Western and Eastern bloc of economic and political influence, Malaysia should prioritise its national sovereignty instead of leaning against the US or China, says Woo. As a nation, it is important for Malaysia to maintain relationships with both sides and carefully observe the relationship between the two blocs.

“We want both sides to have a good relationship with one another. Just because we are not directly involved in the US-China trade war, it does not mean we do not mind them fighting. However, we do not want their relationship to be overly warm either, such that if we do not conform to what they agree on, they might gang up on us and beat us into [toeing the] line,” he warns.

“Ideally, we want the right amount of tension between the two nations. For example, the US’ Trans-Pacific Partnership (TPP) during the Obama administration was certainly a reaction to China’s Belt and Road Initiative (BRI). In the end, we got better access to both the Chinese and US markets with minimal economic adjustments and avoided the political pains of doing so.”

In terms of foreign political risks moving forward, Woo points out that Malaysian organisations have yet to prioritise green and sustainable initiatives, which will eventually come back to haunt us in the years to come.

While Asean member states are slow to sign on and follow through on the Paris Agreement to decarbonise and aim for net-zero carbon emissions, Woo says the Europeans have already gone above and beyond what they promised in 2015 with the launch of the European Green Deal.

“In September last year, President Xi announced that China was committed to being carbon neutral by 2060. The Japanese and South Koreans cannot be seen as lagging behind the Chinese. Within a month, Japan announced that it would be carbon neutral by 2050 — 10 years before the Chinese,” he adds.

“But as for Asean countries, little has been done to scale up their sustainability efforts beyond the 2015 agreement. Countries such as China and the US would not go carbon negative to balance out our positive carbon emissions. If there is one aspect that both the East and West can agree on, it is international climate change cooperation.

“While the world is racing towards zero emissions, our attitude in Asean is to brace for zero emissions. In terms of pursuing sustainability, we have no choice in this manner. If we continue not being sustainable, we can expect to see trade tariffs or green tariffs.”

 

Business as usual

PanPages Trinity Sdn Bhd started out as a publisher of yellow pages — telephone directories of businesses that were used before the advent of online search engines. About 15 years ago, CEO Christopher Ng realised that it was a sunset industry, so he actively looked for internet companies to collaborate with.

That was when he came across Alibaba, one of the larger internet companies in China that was looking to expand beyond its borders. PanPages then became a digital marketing agency and partnered with Alibaba, a business relationship that it has maintained to this day.

Panpages has been Alibaba’s official channel partner for more than 10 years, offering gold memberships to local businesses looking to list their products on the business-to-business (B2B) e-commerce platform. According to Christopher, it remained the sole official channel partner in Malaysia for about seven years until Alibaba decided to expand aggressively in Malaysia, due to the Digital Free Trade Zone initiative under former prime minister Datuk Seri Najib Razak’s administration.

“We were one of the pioneers who partnered with Alibaba outside of China. This was before Jack Ma was popular, before Alibaba was listed on the New York Stock Exchange,” he says.

“We wanted to partner with Alibaba because we would be able to leverage each other’s strengths. Alibaba was very successful in China and excelled in building the platform and creating a unique user experience. However, it was inexperienced [at operating] outside of China due to differences in work culture.

“Being the publisher of yellow pages at the time, one of our key strengths was client reach. We had a lot of customers listed in the yellow pages, so we partnered to offer e-commerce solutions to small and medium enterprises (SMEs). We were more of a sales and customer relationship sort of company and wanted to learn from a technology player. Hence, we were able to get along well with each other.”

Regarding Ma’s disappearance and the recent news surrounding Alibaba, Christopher says the events have not impacted his business whatsoever, nor is he particularly concerned that it will. He says he had known for quite some time that Ma had carefully planned his succession. Over the years, the business maverick had groomed his C-suite and management executives to take over the group, which is why many of them refer to him as “Teacher Ma”. 

Christopher likens companies like his to small cogs in the giant e-commerce machinery that is Alibaba. Due to the well-planned succession, the wheels in the machinery will continue to spin with or without Ma’s involvement, and the recent news surrounding Alibaba has been relegated to water cooler conversations.

Rather than the political situation in China, the Covid-19 pandemic is a much more immediate priority for his business and clients. With companies focusing on conserving resources and acquiring digital talent, foreign political risks are less of a concern by comparison.

“Different countries have different cultures, rules and regulations. When in Rome, do as the Romans do,” says Christopher.

“In fact, Malaysian companies probably excel in this department. Many local companies are able to conduct business in foreign countries because Malaysia is already a multi-racial and culturally diverse nation. Our businesses can actually be versatile and adaptive to international needs.”