Recently, the Chinese government imposed strict controls on tutoring companies providing K12 or basic education after-school classes. Many are guessing that the same harsh measures will befall other internet platforms outside the education sector. However, the Chinese government’s fundamental stance on internet titans such as Alibaba and Meituan suggests that these companies will not be hit so hard.
To understand why platforms such as Taobao, WeChat, Meituan, and Pinduoduo will not be subjected to similar strict controls, we need to go back to the core criterion of externalities.
Economic externalities refers to the non-market impact of the economic activities of an economic entity (including businesses or individuals) on others and on society, where the costs and consequences of the economic activities are not solely borne by the actors. Positive externalities are when the activities of an economic entity benefits others or society, with no cost to the beneficiaries; negative externalities are when the activities of an economic entity hurts others or society, with no consequences to the actor.
To analyse the externalities of platforms such as Taobao and WeChat, we first need to look at their basic wealth creation model and the edge they have over traditional sectors. Take e-commerce platforms for example.
Internet platforms fall into two main categories in terms of wealth creation. First, making current transactions more efficient. Second, expanding the market and making previously impossible transactions happen.
Positive externalities with online e-commerce platforms
If an internet platform can use technology and other methods to make previously impossible transactions happen, that is expanding the market and growing social wealth while increasing employment — these are positive externalities.
The core difference between e-commerce platforms such as Taobao and Pinduoduo and traditional retail is that traditional retail cannot cater to everyone’s needs. A traditional mall has a standard way of displaying its products. People walk into a mall and see the same product displays. And each product on the shelf has to support shop rental fees and operating costs with sales, which is why once the number of users of a product falls below a certain value, the product can no longer be sold in the retail market, because its sales frequency cannot support the cost of putting it on the shelf.
But online e-commerce platforms are different. Data from users’ product searches as well as browsing and purchase histories are put to use, such that each user will see a different product display on the platform according to one’s preference. Hence, internet platforms are simultaneously big data platforms.
Platforms like Taobao and Pinduoduo have gained very positive externalities through big data technology.
For example, Valrhona chocolate is a niche brand. Among 700 million e-commerce users all over China, 97,000 people regularly buy Valrhona, with 3.2 million potential buyers. On Taobao, the supplier of this brand — which has been in operation for only three years — carries 49 products. Pushing these 49 products to 97,000 regular buyers out of 700 million netizens is a question of statistics (for instance, pushing to previous buyers according to their purchase cycle); pushing these 49 products to 3.2 million potential buyers through millions of user tags is a question of big data. It is not possible to manually analyse millions of user tags and seek out 3.2 million potential customers out of 700 million people.
In the traditional marketplace, Valrhona chocolate would not be sold at all in the China market, because there are too few buyers — only tens of thousands over all of China. In the case of snacks, before the rise of e-commerce platforms, there were about 400 varieties of snack products in the whole of China; after e-commerce platforms came in, there are now nearly 40,000 types.
The rise of long-tail niche products has expanded the market and benefited people, while driving production and supply, so that more companies, services, and jobs are created. Platforms like Taobao and Pinduoduo have gained very positive externalities through big data technology. As a government that values good economic management, the Chinese government would not randomly beat down such platforms with positive externalities.
Benefiting SMEs
The basic mindset of the Chinese government when it comes to large-scale internet platforms is that internet platforms set the stage for small- and medium-sized enterprises (SMEs).
This is evidenced by four documents in particular: the Guiding Opinions on Promoting the Healthy Development of the Platform Economy (General Office of the State Council, August 2019); Guiding Opinions on Developing the Platform Economy to Promote the Commodity Trading Market (Ministry of Commerce, October 2019); Guidelines for Anti-monopoly in the Field of Platform Economy (Draft for Solicitation of Comments) (State Administration for Market Regulation, November 2020); and the Guidelines for Anti-monopoly in the Field of Platform Economy (Anti-Monopoly Committee of the State Council, February 2021).
The first line of the Guiding Opinions on Promoting the Healthy Development of the Platform Economy reads: “The internet platform economy is a new organising method for productivity and new momentum for economic development and plays an important role in optimizing resource allocation, promoting industry-integrated development and entrepreneurship and innovation among all the people, furthering industry upgrading, expanding consumer markets, and especially increasing employment.”
By guiding the healthy development of internet platforms, the government can help SMEs to thrive, increase tax income and resolve employment issues, killing many birds with one stone.
The wording about expanding consumer markets and increasing employment highlights that the Chinese government has the correct understanding of the positive externalities of the platforms, and is very clear in its management ideas.
Similarly, the Guiding Opinions on Developing the Platform Economy to Promote the Commodity Trading Market contains clauses on strengthening the market: “Commodity markets shall be encouraged to meet the requirements of the development of the digital economy, a new organisational mode and system structure shall be established, and open platforms shall be established to share with small and medium-sized merchants, so as to exert the spillover effect of platform enterprises, promote the coordinated development of upstream and downstream enterprises, and gradually create a platform economic ecology integrating services and coordinating industries.”
Such clauses also showcase the government’s central idea of internet platforms setting the stage for SMEs. By guiding the healthy development of internet platforms, the government can help SMEs to thrive, increase tax income and resolve employment issues, killing many birds with one stone. Notably, prosperous SMEs bring a country to its most optimum and resilient state of employment. And so, it is believed that large-scale internet platforms will not face the harsh suppression that education platforms have.
Related: Blindspots in the financial regulation of China’s tech ‘platform companies’ | What the Chinese government wants to tell Alibaba and China's tech giants [Part II] | Why platform companies seek monopoly and what happens when governments rein them in
