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Alibaba will ‘continue to be a dominant e-commerce services company’ despite split, strategist says

Macrolens Managing Principal Brian McCarthy joins Yahoo Finance Live to discuss Alibaba’s overhaul, how the split will impact the e-commerce giant, regulation, and the outlook for Chinese tech companies.

Video transcript

BRAD SMITH: Shares of Alibaba, at least the US shares, BABA, you're seeing them higher by about 7.8% today, getting a boost after the Chinese e-commerce company announced plans to split the company into six divisions and explore separate initial public offerings for each. Joining us now to discuss is Macrolens managing principal, Brian McCarthy. Brian, great to have us here with you. First, just want to get your reaction to this, and especially considering that this is an international business, and it really comes down to where some of these different businesses will ultimately find their either headquarters or find their core operations resuming or continuing to move out of.

BRIAN MCCARTHY: Sure. So never a dull moment in China. A very interesting announcement by Alibaba this morning. And of course, it comes a few days after Jack Ma reappeared in China. I don't think those two events are unconnected. We can unpack that. This is going to continue to be a dominant e-commerce services company in China. But I do think that the six units, it looks like now smaller businesses in very, very competitive marketplaces so the big picture question here, I think, is the degree to which these units will remain cooperative in terms of the sharing and utilization of data to move market power. I think that's really the big issue.

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JULIE HYMAN: Well, and Brian, is the issue also what is China's interest? I mean, presumably, I think we can assume that the CCP, the Chinese Communist Party, had a hand in this announcement in some fashion. You can tell me if that's correct. And then if that is the case, what would have been the motivation for that from their perspective?

BRIAN MCCARTHY: Sure, sure. So this goes back to November of 2020 when the so-called tech crackdown started with the cancellation of the anti-BO, which was perceived to be in response to Jack Ma publicly criticizing the policy direction of the Chinese Communist Party. But the bigger picture issue they're dealing with is the utilization of data to build market power and political power. So if you look at the big tech companies in the US-- Alphabet and Apple and Amazon-- they have accumulated incredible market power through the use of data, but it has actually morphed into political power, which is completely unacceptable from the Chinese perspective. So that was never going to be allowed to happen.

And I do draw the conclusion from the coincidence of Jack Ma's reappearance in China that there's been some kind of rapprochement. They've made an agreement. Now, when you make a deal with the Chinese Communist Party, clearly, they are a very powerful negotiating partner, so you can assume they had some leverage to yield and got what they wanted. So what they want is an entity, and this applies to Alibaba, as well as the other large tech firms in China, entities that do not utilize the accumulation of data in a way that threatens the Chinese Communist Party's position in any way, shape, or form. So that data will reside with and be controlled by the Communist Party of China.

So when it comes to the market ramifications of this division of the company, I think we can assume that while people are drawing comparisons to the holding company structure of an Alphabet, for instance, that Alibaba, I don't believe, is going to be able to enjoy the synergies that come from using-- cross-pollinating the data they collect across these divisions.

So if they're not able to do that, then, yes, it's possible that this new structure will unlock some shareholder value that the sum of the parts might be more valuable than the whole. But we need to keep perspective that the whole, as it was valued yesterday, was extremely depressed. Since this tech crackdown started, they've wiped out several hundred billion of dollars of value for Alibaba shareholders. And unfortunately, I think that loss of shareholder value will largely be locked in by this move.

BRAD SMITH: What does the Alibaba split signal, if anything, for other related stocks such as that of a Baidu, such as that of a jd.com, even, or a Tencent holdings?

BRIAN MCCARTHY: Yes, I think it indicates that their value should and will remain depressed relative to international peers that have greater degrees of freedom of how they can utilize and monetize the data they collect. So I, unfortunately, think it will require investors to look at Chinese tech sort of as a more prosaic industry than we're used to thinking about tech firms, which are very powerful, very high growing, and have all kinds of dynamic synergies they can create through the use of data. If that's missing in China, these companies will be revalued at a significant discount to global peers. And then you look at an environment where the economic backdrop is pretty negative in China as well. And there are cyclical issues that these companies are going to have to deal with as well.

JULIE HYMAN: At the same time, of course, the US tech giants are under scrutiny here as well. I mean, leaving TikTok aside for a moment, but, you know, Meta, et cetera, are also under scrutiny. Will they be sort of disadvantaged versus the Chinese peers if there is some sort of regulatory action against them? Or are they sort of on even footing, because there's already a lot of attention on these companies in China?

BRIAN MCCARTHY: Sure. I think I think the Chinese government is much more effective in making their wishes known and felt across the system than our government is at times. So we're debating this in Congress. There's lobbying going on. There's debate on both sides of the issue. US tech companies are able to express their First Amendment rights, whether that is through communications or the lobbying expense, and get their side of the story out there. So it's a much more balanced process, let's say, than in China, where a decision gets made at the top, and it gets enacted. And you can lobby all you want, but if you lobby too much, you're going to end up like Jack Ma did, in exile for a couple of years.

BRAD SMITH: If you're a customer of Alibaba, and, say, you're a small business and you sell some of your third party products on perhaps their e-commerce site, and then you also buy into whatever their cloud services are as well, or perhaps you pioneer-- or not pioneer, but you offer some type of payments through one of their payments subsidiaries, all of these things considered, you've now just become a customer of three, maybe four different businesses now, not including even their local services group. So all of that, your customer experience probably just got that much worse. But at the same time, it's who are you expecting to have to communicate with for that kind of single source of information at the end of the day.

BRIAN MCCARTHY: Yes, it's a different customer experience for sure. And there might be some dislocation on the customer side if these businesses really become to be run separately. But then it also undercuts the power of the organization relative to the customer. So it's early days here. We don't know exactly how this is going to play out. But I think theoretically, you can also say this will lead to a less anti-competitive, less monopolistic structure as far as the users of these tech services go.

So I think you're right that there'll be some dislocation certainly, but I think part of this from the government's perspective is, there are antitrust issues that need to be considered here. And it could create a more competitive marketplace. But then again you have these from the perspective of the Alibaba equity valuation. These are going to be-- if they become real six standalone smaller companies, some of them are in very, very highly competitive marketplaces. So that is to the benefit of the end user to the detriment of the company if it plays out that way.

JULIE HYMAN: Brian, thanks for your perspective on this as we try to wrap our heads around what's going on. Brian McCarthy, managing principal at Macrolens, appreciate it.