Scaling back and focusing on core functions is the latest consensus for Chinese internet companies

The once high-flying Chinese internet companies have reached a turning point, as regulatory crackdowns and economic headwinds have pushed them to scale back and focus on their main businesses.

In February, e-commerce colossus Alibaba reported its slowest quarterly revenue growth since going public in 2014. The company, which reportedly considered cutting around 20% of its employees in certain business groups, said it would step back from its earlier goals to rapidly expand the user-base and instead focus on retaining users on its platforms.

Then, Tencent, the Chinese social and gaming giant, reportedly planned to cut about 20% of its workforce this year within its cloud and smart industry business group (CSIG), which employs nearly 20,000 people. A division of CSIG that provides online education has seen its business shrink sharply since the government banned for-profit K12 online tutoring last year, according to people familiar with the matter.

In addition, Tencent’s domestic gaming business was also under pressure, with revenue rising only 1%, as regulators reduced the amount of online game time for children under 18 and stopped issuing licenses for new games. In China, games must be approved by the government before they can be launched and commercialised.

Tencent has acquired or invested in more than 100 video game-related companies in the past year, and about 30% of the deals completed were companies outside of China. Heading into 2022, it’s not slowing down, having acquired or invested in several game studios, including Inflexion Games, 1C Entertainment, Tequila Works, RiffRaff Games, Offworld Industries, and more.

Economic downturns and the regulatory blows to the education sector also drove Tencent’s fourth-quarter ad revenue down 13% this year relative to last. As a result, for the final quarter of 2021, the giant reported its slowest revenue growth on record.

“2021 was a challenging year… We are proactively adapting to the new environment by optimising costs, increasing efficiency, sharpening our focus on key strategic areas, and repositioning our sales for sustainable long-term growth,” said Pony Ma, Chairman and CEO of Tencent, on the latest earnings call.

JD.com, China’s second-largest e-commerce platform, has also begun to streamline its workforce, mostly in its group-buying business Jingxi (where many individual buyers can collect their orders into a significantly larger order which benefits both sellers and buyers), within which roughly 10-15% of its employees would be laid off, Business Insider reported, citing multiple Chinese news outlets.

After China tightened regulations on the community group-buying industry, banning companies from dumping goods, disrupting market orders and more, JD.com swiftly pivoted the focus and resources to its express grocery delivery business which focuses on high-end customers in big cities. Hence, the group-buying business is becoming increasingly sidelined. According to JD.com’s latest financial report, Jingxi, which was launched in 2019, lost 3.22 billion yuan in the fourth quarter, more than double the loss in the same period last year.

Besides Jingxi, a JD.com business unit that handled sales of books, pet products, and cross-border e-commerce on the company’s main site also planned to cut staff by 15 to 20%, Chinese tech media 36Kr reported.

“The Internet industry has developed into a more mature stage where the traffic-driven development model fuelled by subsidies is being replaced by a quality and operational efficiency-oriented approach,” said Xu Lei, the CEO, during the company’s recent results call. “Companies must grasp the core business logic and consistently deliver on their long-term strategy.”

Public-traded e-commerce software-as-a-service (SaaS) platform Youzan confirmed on March 29 that it will cut 20% of its workforce. Previously, the company, known as China’s Shopify, has been expanding very aggressively, even offering solutions in the education industry. According to the company’s financial results, its revenue in 2021 dropped 13.74% year on year to 1.57 billion yuan, and the annual loss increased by 503.5% year on year to 3.293 billion yuan.

In an internal email sent on the day the layoffs were confirmed, CEO Zhu Ning said that the company will return to focus on digitalisation works in the new retail field, optimising organisational efficiency and capabilities to boost per-employee productivity.

The COVID-19 outbreak has brought Youzan a nearly 100% year-on-year growth in 2020; therefore, the company had significantly raised its expectations, increased investment, and extended its offerings, said the internal email, adding that the growth in 2021 was very limited due to the impact of the ongoing pandemic on the retail sector and the economy.

No less than a dozen Chinese Internet companies have declared layoffs since the third quarter of last year, but many of them are still ramping up their investment in core businesses.

In 2021, the invested total of Alibaba and its affiliates reached 91.899 billion yuan ($14.50 billion). Though it’s a year-on-year decrease of 27.4%, investments in e-commerce logistics and corporate services are still edging their way up.

Logistics and warehousing are also the focuses of JD.com. In March, it announced to acquire a 66.49% stake in domestic courier Deppon Logistics for 9 billion yuan and recently invested $700 million in its Hong Kong-listed logistics subsidiary, JD Logistics.

Wu Yuefeng, investment manager of Beijing-based Fengjing Capital, announced on Weibo that the majority of the businesses that were cut back were due to poor returns on investment, but core departments were immune. “Most of the risks associated with Chinese Internet firms have eased” he said.

There is also evidence of these financial troubles reflected on a larger scale, with China also cut its annual economic growth target to its lowest level in decades on March 5, as challenges including an uncertain global recovery and a downturn in the country’s vast property sector cast a shadow on the world’s second-largest economy.

Photo by Darmau Lee on Unsplash