China’s Internet Industry in the Face of Changing Industrial Life Cycle

Recently, a number of large Chinese internet enterprises have been disclosed to have started large-scale layoffs. Alibaba recently embarked on a “personnel realignment and optimization” in its business, which includes its lifestyle services. Tencent has also started to make adjustments due to regulation of the game industry and a weak advertising market. Meanwhile, JD.com and Bilibili had referred to the layoffs as “graduation”, sparking heated debates online. Didi Chuxing, Meituan, ByteDance, and other new-generation internet platform enterprises are also said to be adjusting their business lines and laying off employees on a large scale. In the view of researchers at ANBOUND, the restructuring and layoffs of these internet platform enterprises on the one hand reflect the proactive adjustment of enterprises in the face of complex changes; on the other hand, it also means that China’s internet industry is ushering in cyclical changes. For large internet platforms accustomed to the current business development model, the challenges of the downward cycle are not only related to the survival and development of enterprises, but also related to the construction of domestic industrial ecology and the stability of the capital market.

Prior to this, when Alibaba, Meituan, and other large internet platforms were facing enhanced anti-monopoly supervision and rectification. During that time, ANBOUND mentioned that the extension and expansion of internet platform enterprises out of the internet industry indicated that the development of the established “internet traffic economy” had reached its boundary. At present, this boundary is very obvious and clear. From the annual reports released by enterprises, tech giants like Alibaba, Tencent, and Meituan are facing a situation of limited market expansion and declining profits. This has actually illustrated the saturation of the whole market. With the strengthening of cross-industry anti-monopoly and the inability of internet enterprises to develop across fields with their Internet traffic advantages, they will naturally face the situation of rising costs and declining profits. Outside of China, Meta (previously known as Facebook) is also facing similar problems. These are all characteristics of the changing industrial life cycle.

The Financial Times recently noted that China’s internet economy has reached an inflection point since last year. Many people regard the implementation of the double reduction policy and the anti-monopoly policy as an inflection point in the great turning of the internet industry. The topping out of the internet dividend well before 2019 already signaled that the market was close to saturation and was about to reach an inflection point in the future, and the subsequent implementation of regulatory policies and changes in economic fundamentals due to the COVID-19 pandemic have only accelerated the process.

We find that these internet enterprises should have noticed the market boundary and the change of the industrial life cycle before the policy changes. However, it appears that they still adopt the strategy of expanding business and market. As a result, they not get fail to obtain much benefit, but instead getting caught in the dilemma of increase in expenses and decrease in profit. As the industrial life cycle begins to change and the inflection point appears, the development strategy of transformation by expansion naturally makes the enterprise inevitably suffer a certain impact. A similar situation, in fact, has long appeared in conventional industries such as real estate. In recent years, some real estate enterprises have tried to transform and develop in different fields such as the electric vehicle industry in the face of the gradual saturation of the market. However, in the face of changing policies and industrial life cycle, not only are new investments being hit, but existing businesses are falling into debt due to a lack of cash reserves.

The Financial Times article raises a challenging question: can large internet enterprises, which have never been tested by industrial life cycle, survive market downturns, compared with conventional mature sectors such as finance and energy, which have been tested many times? This question, despite of its importance to internet enterprises, does not seem to have an answer for now. At present, most internet enterprises are still adjusting their businesses by means of shrinking the scale, laying off employees, and reducing cost expenditures. The Financial Times article points out that layoffs are a mandatory part of becoming a modern enterprise for Internet enterprises that have been expanding rapidly in the past. In addition, it may not be enough for internet enterprises to rely only on layoffs and salary cuts to survive the downward cycle. Adjusting the proportion of core and side businesses, optimizing the structure, and truly improving the efficiency of enterprise management are the most easily ignored aspects after layoffs.

However, what it does not mention is that the rapid development of the internet industry is closely related to its deep integration with the capital market. In the upward cycle, Internet enterprises rely more on capital market financing to obtain online traffic, then profits from the traffic. Will such internet traffic economy survive the industrial downturn? In ANBOUND’s view, the industrial cycle changes in the Internet industry may be accompanied by greater risks than the cyclical changes in conventional industries. This is because under the “internet traffic economy” model, internet enterprises rely more on the expected future profits to raise funds from the capital market, and obtain the market share through massive subsidies. However, this model will face a contradiction between capital return and market expansion as digital boundaries become clearer. Once the cycle reverses, the expected future earnings of the enterprises will inevitably decline, and they will no longer be able to tap capital markets for more funds. In this case, these internet enterprises would be in default, as many real estate enterprises are now.

As far as the industrial life cycle of the internet industry is concerned, internet enterprises in the downward cycle need to consider not only the structural adjustment and contraction problems commonly faced by conventional industries, but also the cyclicality of capital. How will Internet enterprises, which rely on the capital market for financing to accelerate their development, face the bursting of capital bubble without making profits? How should they face the shift of capital flow under the change of interest rate environment? Once abandoned by the capital, the situation that such enterprises will face will be self-evident.

Final analysis conclusion:

The ups and downs of the internet industry have not deviated much from the traditional theoretical framework of the industrial life cycle. Maintaining and sustaining the development of enterprises in the midst of cyclical fluctuations and changes are not only urgent issues for these enterprises right now, they are also a focus that the capital market pays special attention to.

Writer by Wei Hongxu
A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK

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