Talking Point

Payments crisis for Ma

Chinese critics say Jack Ma has lost trust over handling of Alipay issue

Sparring match: war of words between tech tycoon Jack Ma and top business journalist Hu Shuli

Early this month at the All Things Digital conference, Jack Ma, the founder and chairman of Alibaba Group, insisted: “I don’t want to be liked. I want to be respected.”

But for Ma, the risk is that his decision to split-off Alipay, China’s most popular online payment system, from the rest of the Alibaba Group will cost him plenty of the respect that he claims to crave.

The controversy made headline news last month when Yahoo, which owns 43% of the Alibaba Group, announced that ownership of Alipay had been transferred to another company controlled by Ma without its knowledge or approval.

Ma quickly denied the accusation, saying that Yahoo was aware of the transfer and that the move was to bring Alipay in line with new laws which prohibit foreign ownership of online payment companies (see WiC107).

But the spat was brought to life once again last week when several high-profile critics launched attacks on Ma in China itself. Some accused him of violating contract agreements and undermining the fundamentals of the market economy.

Ma’s response? “I made a ‘difficult decision’ as the saying goes. It’s not perfect, but it’s right.”

Let’s backtrack a little…

Alibaba Group, which also controls Taobao, the country’s largest online shopping site, has two major foreign shareholders: Yahoo and Softbank (the Japanese firm owns about a third of the company). China’s internet sector is famously closed to foreign web giants, so Yahoo and Softbank – through their lucrative Alibaba stakes – looked to be rare examples of foreigners enjoying success in the sector.

That perception started to change last year, when the central bank published new rules requiring any Chinese company applying for a payments licence to report their relationships with foreign investors.

Ma, worried that Alibaba Group’s ownership structure could pose a problem, proposed to transfer Alipay to a subsidiary (controlled by him but with profits to be transferred back to Alibaba Group). On paper, Alipay would then look like a wholly-domestic company. Yahoo and Softbank agreed that the transfer needed to take place in order to obtain proper licencing for the unit.

What went wrong? Nanfang Daily speculates that the regulators may have taken a harder line with Alipay about its contractual ties with the foreign firms (i.e. the transfer of profits back to Alibaba Group). With the deadline for licence registration approaching, Ma moved to sever ties more substantially between Alibaba Group and its payment subsidiary, without consulting the board.

By doing so, Alipay disappeared from Alibaba Group’s balance sheet.

“Not perfect” at all for Softbank and Yahoo?

So far there are few details as to how the shareholders will be compensated (only $51 million has been transferred to Alibaba Group for the spin-off of Alipay – for a business operation reckoned to be worth billions of dollars). Ma has assured reporters that he is working with Yahoo and Softbank on a fuller settlement on the transfer.

But the big question is why Ma didn’t notify the board before cutting the contracts?

Was this in line with Alibaba agreements signed in 2005, which stipulate that asset transfers worth more than $10 million (including subsidiaries) must be approved by the company’s board?

Some have also floated conspiracy theories that Ma was seeking to to boot Yahoo out of Alipay because of his own strained relations with the US firm (well-documented in WiC; see issues 79 and 107).

The question many then asked: if Ma could do this with Alipay, could something similar happen with Taobao, the hugely popular online retail site that is perhaps Alibaba’s most valuable asset? Yahoo’s shares are still down 20% in value since the Alipay transfer was made public.

Ma might have expected criticism in the US, but he may be more surprised by the backlash in China itself. The concern is that the episode will be held up as the latest exampple of a Chinese company expropriating an asset from foreign investors. On various weibo, a Chinese equivalent of Twitter, Ma has been called a “bandit” and a “thief”. Others said Ma’s action could spark a negative investor reaction to Chinese internet stocks in general.

Then last week, Hu Shuli, one of China’s most influential journalists, made waves by slamming Ma for violating contract principles.“Management led by Ma took unilateral action and violated a basic principle of commercial society by failing to abide by a contract. A contract requires credibility and integrity. A violation leads to imbalance and weakens an enterprise,” Hu wrote in an editorial “Why Jack Ma is Wrong,” published in Century Weekly on June 12. Hu also warned: “Ma is paying a heavy price: the international business reputation that he has been building for years has been tarnished, and prospects for Alibaba’s long-term growth have been diminished.”

Wang Ran, a personal friend of Ma and chief executive officer of private investment bank China eCapital Corporation, was also critical. “He shouldn’t have unilaterally terminated the contract without getting the approval from the board,” Wang wrote in his blog on Sina. “I understand that he was frustrated with the delays and indecision from some of the members on the board, but just going ahead with the transfer is not right, either.”

“It’s like before you can get a divorce, both parties need to talk about the distribution of assets. And even though someone is pushing you to marry your new girlfriend, you can’t just forge the signature of the other party and pretend it’s done. And you definitely cannot enter into another marriage without finishing the divorce procedures,” Wang mused.

Ma’s side of the story?

Ma has long insisted that Alipay had to be 100%-owned by a Chinese entity in order to obtain the appropriate licenses to operate.

In a text-message exchange between Ma and the journalist Hu, he also implied that he had been under pressure from the authorities: “It’s a tough situation here. You know the implications of authorisation [i.e. getting a license].”

And more starkly still, he hints at the dangers of being an entrepreneur in China: “The market economy tells us to steer clear of politics. But if I ruin Alipay, I may face prison in addition to bankruptcy.”

Still, that doesn’t explain why companies like Tenpay, an online payment provider controlled by Chinese internet giant Tencent, also received a licence in May along with Alipay. Tenpay is controlled by Tencent Holdings, which is 30% owned by South African media firm Naspers.

Century Weekly reported this week that a person who had helped to draft the original regulations at the central bank said that it had not taken the initiative to tell any individual company how it should proceed. “More often than not, it’s the companies that call the bank to ask if their contractual ties with foreign firms will work,” says the insider. “Companies that have contractual ties with foreign companies, under the new rules, would require the approval of the State Council (China’s Cabinet). But just because a company has to apply to the State Council doesn’t mean it will not be given a licence.”

The inconsistency between this statement and Ma’s own is characteristic of a regulatory environment fraught with uneven enforcement, broadly-worded rules and a lack of transparency, says Tom Shoesmith, head of law firm Pillsbury Winthrop Shaw Pittman LLP’s China practice, in an interview with Bloomberg.

The FT Chinese website also ran an editorial last week arguing that the dispute over Alipay was the direct result of a lack of clear rules and regulations. “It is opaque procedures that gave Ma the opportunity to take over Alipay. It is also because of this that Ma, Yahoo and Softbank are in the mess they are in today.”

What’s next?

The better news this week is that Softbank, Yahoo and Alibaba have issued a joint statement claiming to have “made substantive and encouraging progress” toward an agreement over the ownership of Alipay, says Reuters. Commentators agree that any deal will be difficult. That’s because the Chinese government increasingly sees online data management as a sensitive area, where it is “inappropriate” for a provider to have high levels of foreign ownership, says Joe Tsai, chief financial officer of Alibaba Group. Between them Yahoo and Softbank still own 72.6% of Alibaba Group.

But the real danger of the Alipay saga is that it may force some foreign investors into a China rethink.

“Investors sold on the China story need to take heed: If what you buy in China only stays ‘bought’ as long as its convenient for Beijing and its local friends, you might consider that you’re just leasing the asset,” warns a contributor by the name of Northwest Investor on the Seeking Alpha blog. “Like Hong Kong and Macau, if they want it, sooner or later it’s going back.”


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