A significant slowdown in the second-largest economy in the world, fueled by Beijing’s stringent Covid policy, is having a negative impact on China’s technological giants, who recently saw their worst quarter of growth in history.
The second quarter of this year saw the first-ever flat year-over-year quarterly revenue increase for e-commerce company Alibaba and the first-ever sales decline for social media and gaming company Tencent. The second-largest e-commerce company in China, JD.com, reported the weakest sales increase in company history, and electric car manufacturer Xpeng reported a larger-than-anticipated loss and bleak guidance.
These businesses collectively have a market value of more than $770 billion.
China experienced a spike in Covid cases during the second quarter. In order to contain the virus, China has adhered to its tight “zero-Covid” policy, which calls for lockdowns and widespread testing. For several weeks, major cities, including Shanghai, were under lockdown.
The second quarter’s 0.4% growth in China’s economy had an effect on both consumer confidence and corporate investment on things like advertising and cloud computing.
These challenges reached China’s IT behemoths.
On the company’s earnings call this month, Alibaba CEO Daniel Zhang stated that “retail sales declined year-over-year in April and May owing to the revival of Covid-19 in Shanghai and other key cities, and has steadily rebounded in June.”
Alibaba reported that some of its cloud computing projects were delayed and that its Chinese logistics networks were also impacted.
One of the largest gaming companies in the world and the owner of the messaging app WeChat, Tencent, also suffered the effects of the zero-Covid regulation. Due to fewer people utilising its WeChat Pay mobile payments service outside of their homes, its fintech services income rose more slowly than in prior quarters. As businesses cut back on spending, the company’s internet advertising revenue also dropped significantly.
Because it manages a large portion of its logistics supply chain and inventories, JD.com did well in the second quarter. However, due to lockdowns, fulfilment and logistics expenses did increase.
The manufacturer of electric vehicles XPeng stated that it anticipates third-quarter deliveries of 29,000 to 31,000 vehicles. But the market had not anticipated such dismal guidance. Brian Gu, president of XPeng, noted that “traffic in the stores are fewer than what we’ve experienced before because (of the) post-COVID circumstances,” in addition to seasonal downturn.
The pandemic gave China’s internet giants a boost as more people resorted to the internet for lockdown-related activities like shopping and gaming. This has complicated year-over-year comparisons. The macroeconomic environment has become much more challenging as a result of the Chinese economy’s current challenges.
A much harsher regulatory environment continues to be a challenge for China’s technology sector. China has enacted stricter regulations in the last two years, covering everything from gaming to data protection.
Investors are apprehensive about their view due to growth rates that have fallen more dramatically than in past years.
“What I find interesting is how the narrative on the big tech companies… has changed,” Tariq Dennison, wealth manager at GFM Asset Management, told CNBC via email. “COVID was expected to benefit the big online platforms at the expense of ‘offline’ businesses, as much of the economy would be stuck at home with little other choice but to shop online and entertain themselves online.”
Although there are no immediate COVID worries as a result of the recent revenue and earnings decline affecting these well-known IT companies, many long-term investors, including myself, have revised their assessments of these companies’ long-term growth potential.
According to Dennison, a long-term downturn would be of worry because Tencent, Alibaba, and JD.com had historically maintained more than 25% annual revenue growth.
The long-term prices of these shares would be significantly affected, according to Dennison, “if this quarter is a hint of a sustained drop to single digit growth rates, rather than merely a temporary dip.”