‘High-flying’ Chinese tech giants are scaling back costs

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Executives at Alibaba and Tencent have been concentrating on reducing expenses across the board, from staff to closing non-core operations.
It follows the release of second quarter numbers from Alibaba and Tencent, which demonstrated that these formerly nimble and high-flying behemoths are no longer expanding.
Alibaba and Tencent have been impacted by the Covid-caused slowdown in China’s economy, which is having an impact on everything from consumer spending to advertising expenditure
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Image Source- Mint

During earnings calls with investors, Chinese internet titans Alibaba and Tencent frequently discuss all of their breakthroughs and new products.

However, the second quarter was unique. The two biggest internet companies in China’s management paid more attention to controlling expenses than to anything particularly showy.
It follows the release of second-quarter data from Alibaba and Tencent, which demonstrated that these formerly nimble and high-flying behemoths are no longer expanding.
For the first time ever, the largest e-commerce company in China, Alibaba, reported flat growth for the period from April to June. Tencent, a major player in social media and gaming, reported its first-ever quarterly revenue decrease on Wednesday.

A Covid-caused economic slowdown in China is having an impact on consumer spending and advertising budgets, which has been felt by Alibaba and Tencent. Results are also being hampered by the tightening of domestic technology legislation over the past 1.5 years, which has affected everything from antitrust to gambling.

Both behemoths have sought to exercise greater restraint when it comes to their expenditure as income continues to be under pressure.

In a call with investors on Wednesday, Tencent CEO Ma Huateng said, “During the second quarter, we actively left non-core companies, reduced our marketing expenditure, and slashed operating expenses.” This let us grow our profits sequentially despite challenging revenue conditions.

In fact, Tencent’s earnings increased 10% over the prior quarter when certain non-cash factors including the effects of merger and acquisition activities were taken out.

Martin Lau, the president of Tencent, stated the company discontinued non-core ventures including online learning, e-commerce, and game streaming. The corporation reduced low-investment areas like user acquisition and trimmed its marketing budget. In the second quarter, Tencent’s selling and marketing costs decreased 21% over the prior year.

The number of employees at the Shenzhen-based corporation decreased by 5,000 over the first three months.

Tencent’s chief strategy officer, James Mitchell, stated that the firm can “return the business to year-on-year profits growth, even if the macro environment continues as it is now” and even if sales growth remains flat” with these efforts and investments in new areas.

Meanwhile, Alibaba announced its cost-cutting initiative earlier this year and is still moving through with it.

During the company’s results call this month, Alibaba’s chief financial officer, Toby Xu, stated, “In the upcoming quarters and the remaining portion of this fiscal year, we will continue to follow the strategy of cost optimization and cost management.

In several of its critical operations, the Chinese e-commerce behemoth, according to Xu, has “narrowed losses.”

Where’s the growth coming from?
To persuade investors that even while expenses are being reduced, Alibaba and Tencent are still making investments in the future, they have had to do a careful balancing act.

Cost optimization alone won’t get them back on the path to increasing profits. In an email to CNBC, adjunct professor of law at New York University Winston Ma said, “They need to discover new growth drivers.
Alibaba has been concentrating on growing its cloud computing business because executives and investors think it will be essential to the company’s future profitability. Alibaba’s cloud business saw the strongest revenue growth in the June quarter.

The WeChat short-video feature’s adverts have the potential to become into a “significant” source of income in the future, according to Tencent. WeChat, the most popular messaging app in China with over a billion users, is operated by Tencent.

According to Chelsey Tam, senior equities analyst at Morningstar, Alibaba will continue to concentrate on industries with “long-term promise,” such cloud computing and international e-commerce. Costs and benefits will be assessed for enterprises that are not profitable.

Tencent has “done a fairly excellent job managing long-term investments with near-term profits,” said Ivan Su, senior equities analyst at Morningstar.

“If you look at the cost measures they announced, some of the reductions are permanent, like moving to the cloud and closing non-core companies that weren’t successful, while others (like cutting back on marketing budgets and recruiting more slowly) are more transient in nature. So they have a variety of levers at their disposal to achieve this equilibrium,” .

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