FINDING DOMINANCE of platform - Alibaba as a source ofabusive conduct 9 Trang 3 Nowadays, laws and regulations across countries and industries can change rapidlydepending on the governm
FOREIGN TRADE UNIVERSITY FACULTY OF ECONOMICS AND INTERNATIONAL BUSINESS ************* INTERNATIONAL BUSINESS RISK MANAGEMENT REPORT REGULATORY RISK MANAGEMENT: A CASE OF ALIBABA Instructor: MA Pham Thanh Ha Group 11: Nguyen Thi Khanh Linh Duong Phuong Mai Nguyen Thao My Do Thanh Tam Le Thi Thu Trang June, 2023 2011520025 2012520027 2012520029 2014520018 2011520048 TABLE OF CONTENTS I INTRODUCTION II LITERATURE REVIEW Definitions 1.1 Regulatory risk 1.2 Regulatory risk management 1.3 Differences between regulatory risk management and compliance risk management Factors causing regulatory risk Consequences III CASE ANALYSIS Overview of Alibaba Case in China The situation: China completes overhaul of antitrust law to corral Big Tech 2.1 Rising concern about tech giants’ power over the world 2.2 China’s Anti-Monopoly law: New regulations 2.2.1 RELEVANT MARKET DEFINITION 2.2.2 FINDING DOMINANCE of platform - Alibaba as a source of abusive conduct 2.2.3 Amendment of regulations to China’s Anti-Monopoly Law The impact of the Anti-Monopoly Policy on E-Commerce market in China 3.1 Market competition 3.2 Alibaba Alibaba’s risk management policy IV RECOMMENDATIONS V CONCLUSION 3 3 4 7 7 9 10 13 13 14 15 15 16 I INTRODUCTION Nowadays, laws and regulations across countries and industries can change rapidly depending on the government’s policy, especially in politically unstable countries Since amendments to laws, rules, or regulations may result in regulatory risks, effective regulatory risk management is a significant concern for businesses in today's global marketplace to not only protect a business from devastating consequences such as substantial fines, reputational damage, and loss of business opportunities, but also remain competitive in their respective industries In this report, we choose to analyze Alibaba’s regulatory risk management because Alibaba Group Holding Limited is a multinational technology company headquartered in China specializing in e-commerce, retail, and technology services, and it has become the world’s biggest e-commerce platform Since its founding in 1999, Alibaba has rapidly expanded and currently operates in more than 200 countries and regions around the world Moreover, digital adoption and transformation in retail are accelerating globally since the COVID-19 pandemic, reshaping consumer behavior and enterprise operations While such transformation presents tremendous opportunities, it also requires focus, innovation, and agility in establishing the necessary strategic capabilities According to Alibaba’s annual report in 2022, they have stayed focused on strengthening their leadership and building core capabilities in three strategic areas: consumption, cloud, and globalization With this expansion, the company has also faced growing regulatory risk management challenges including antitrust investigations and regulatory scrutiny related to data privacy concerns, which have a significant impact on their business We will examine Alibaba's regulatory risk management strategies in response to these challenges and evaluate their effectiveness By using it as a case study, this research will come up with some recommendations for other companies in the e-commerce industry to demonstrate the importance of effective regulatory risk management as well as develop their own regulatory risk management strategies Our report will include three parts to analyze regulatory risk management: Part 1: Literature Review Part 2: Case Analysis Part 3: Recommendations for Alibaba and other companies in the e-commerce industry II LITERATURE REVIEW Definitions 1.1 Regulatory risk Regulatory risk refers to the potential negative impact on certain businesses due to a change in the laws and regulations in a country or region The term is commonly found in articles about currency traders, whose exposure to financial loss is affected by the relevant regulatory agencies when they make changes in current rules and regulations or impose new ones Businesses may face several regulatory risks, including legal, compliance, operational, and reputational risks Legal risk is being subject to lawsuits or penalties for not complying with regulations, while compliance risk involves not adhering to regulatory requirements Operational risk relates to the potential for disruptions to business operations due to regulation changes and reputational risk involves damage to a company’s reputation due to negative regulatory actions 1.2 Regulatory risk management Regulatory risk management aims to identify and evaluate these risks and implement measures to minimize their potential impact Regulatory risk analysis is essential for businesses operating in highly regulated industries It involves evaluating potential risks and impacts of regulatory changes and ensuring compliance with regulatory requirements Failing to comply with regulations can result in significant financial losses, fines, and reputational damage Therefore, businesses must proactively identify and manage regulatory risks to minimize potential negative impacts 1.3 Differences between regulatory risk management and compliance risk management Compliance risk is the risk that a company will have been determined to be in violation of already established laws or regulations This can have many causes, including inadequate controls, negligence, and human error Ensuring that a business is capable of maintaining compliance and doing so can be a source of significant expense As with regulatory risk, managing compliance risk is an essential part of a business's overall risk management Managing regulatory risk involves forward-looking strategic thinking, as well as careful monitoring of public opinion and the regulatory process in a business's given sector Compliance risk, on the other hand, involves knowledge of existing laws and regulations and a more systematic approach to verifying that the company is compliant with all of them Factors causing regulatory risk There are some main factors that cause regulatory risk : Legislative changes: Legislative changes made by governing bodies have the potential to create regulatory risk Businesses face more regulatory risk as a result of new laws or revisions to current laws that impose stricter regulations or new compliance standards Political shifts: Regulatory risk can be caused by changes in political environments, such as elections or changes in government goals Different policy objectives may be introduced by new governments, changing rules that affect businesses Global and regional developments: Regulatory risk can be influenced by global and regional developments For example, international trade agreements, geopolitical events, or changes in international standards can trigger regulatory changes that affect businesses operating across borders Technological advancements: Technological advancements often outpace existing regulations, creating regulatory gaps To handle developing technologies like artificial intelligence, cryptocurrencies, or data privacy, governments may react by proposing new legislation or updating current ones These changes might result in increased regulatory risk for companies doing business in certain locations companies doing business in certain locations, these changes might result in increased regulatory risk Public sentiment and societal pressures: Public sentiment and societal pressures can drive regulatory changes The growing focus on data privacy and protecting the rights and interests of customers and key stakeholders has resulted in a flurry of global, national, and state regulations The already complex regulatory landscape that organizations are required to wade through saw a fresh wave of regulations and numerous regulatory updates in the past year due to the COVID-19 pandemic Financial crises and market disruptions: Major financial crises or market disruptions can prompt regulatory reforms aimed at preventing similar events in the future These reforms can introduce stricter regulations and oversight, resulting in increased regulatory risk for financial institutions and other affected sectors Consequences Regulatory risk refers to the potential negative impact on businesses and industries resulting from changes in regulations, laws, or government policies The consequences of regulatory risk can vary depending on the specific circumstances and the industries involved Here are some common consequences associated with regulatory risk: Document continues below Discover more from: Risk Management Trường Đại học Ngo… 63 documents Go to course Quản lý rủi ro tind 14 dụng Ngân hàng… Risk Management 100% (3) Chapter - Insurance operation Risk Management None Green Multi-Toned Pattern Recognition… Risk Management None notes of lecture Risk Management None RISK Management AND 31 Insurance Risk Management None Saunders chapter 12 34 this is a book related… Risk Management Compliance Costs: Regulatory changes often require businesses to adjust their operations, processes, or products to meet new standards or requirements This can lead to increased compliance costs, such as investing in new equipment, implementing additional safety measures, or hiring specialized staff to ensure adherence to the new regulations Financial Impact: Regulatory risk can have a significant financial impact on businesses Compliance costs, fines, penalties, or legal expenses associated with non-compliance can erode profits and strain resources In some cases, businesses may need to allocate significant funds for regulatory compliance, reducing their ability to invest in other areas or expand their operations Operational Disruptions: Regulatory changes may disrupt existing business models, processes, or supply chains Companies may need to modify their operations or find alternative suppliers or partners to comply with new regulations These adjustments can cause temporary or even prolonged disruptions, leading to delays, inefficiencies, and decreased productivity Market Uncertainty: Regulatory risk can introduce uncertainty into the market, affecting investor confidence and business decision-making Uncertainty about future regulations or their potential impact on the industry can lead to hesitancy in making long-term investments or strategic decisions This can result in a slowdown in business growth and innovation within the affected industry Competitive Disadvantage: Regulatory changes can create disparities between businesses operating in the same industry If some companies can adapt more quickly or effectively to new regulations than others, it can lead to a competitive disadvantage for those lagging behind Compliance requirements can also favor larger or more established players who have the resources to navigate complex regulatory landscapes, potentially limiting competition and hindering market entry for new or smaller businesses None Reputational Impact: Non-compliance with regulations can harm a company's reputation Negative publicity, customer dissatisfaction, or legal disputes resulting from regulatory violations can tarnish a brand's image and erode customer trust Rebuilding a damaged reputation can be a challenging and costly endeavor III CASE ANALYSIS Overview of Alibaba Case in China On April 10, 2021, China's State Administration for Market Regulation (SAMR) issued a list of 28 anti-monopoly legislation infractions Each instance featured merger transactions that had not been reported for antitrust investigation, some dating back to 2011 According to documents, officials found earlier this year that each of these transactions violated the country's current competition regulations Alibaba, one of the world's largest e-commerce enterprises, has been fined SAMR claimed that Alibaba misused its dominating position in China's online retail platform market through a practice known as "choose one from two" punishing merchants who maintain online storefronts on both Alibaba and its rival platforms, or who conduct promotions on both platforms at the same time Alibaba was levied a record fine of 18.2 billion CNY (approx $2.8 billion), which represents 4% of the company’s domestic annual sales The fine exceeds and almost triples China’s antitrust fine imposed on Qualcomm in 2015, 6.088 billion CNY, the record keeper before Alibaba The situation: China completes overhaul of antitrust law to corral Big Tech 2.1 Rising concern about tech giants’ power over the world Across the globe, serious concerns have emerged over tech giants ‘becoming too-big institutions, not just providing crucial utilities that are central to the lives of citizens but setting the rules of the game in which society operates Despite reservations about the fairness of how they acquired market power and how they may be employing (or misusing) that power, most competition agencies took their time acting, prompting scholarly criticism The difficulties faced by Ant Group, a subsidiary of Alibaba Group, come at a time when the Chinese government has moved to "regulate" the private sector, levying fines and conducting investigations against numerous private firms various technology firms, such as the "tycoon" of online auto booking Didi Global Inc and ByteDance, the owner of TikTok must take action in the national interest These corporations have vast quantities of wealth and user data, making it impossible for the government to oversee them Meanwhile, Chinese policymakers are concerned about Alibaba and Ant Group's growing market dominance Ant Group owns Alipay, China's leading mobile payment service This payment application currently has over billion users The regulatory authority claimed that Ant Group utilized data obtained from Alipay users to gain an unfair advantage over banks and make credit risk monitoring harder in the country Furthermore, Chinese officials are keeping a close check on Yu'e Bao, a Chinese money market fund (MMF) run and managed by Ant Group This investment product enables hundreds of millions of Alipay users to deposit funds into accounts with interest rates higher than those offered by China's state-owned banks With about $244 billion in assets under management, Yu'e Bao's flagship fund became the world's largest money market fund in 2018 However, Chinese regulators have asked Ant Group to limit the fund's size due to concerns that the fund has taken on too much risk At that time, perhaps the "one move" of billionaire Jack Ma had "fallen into the sights" of Beijing Jack Ma's speech criticizing Chinese regulators for stifling financial innovation Last October was the last straw in the relationship between the Chinese government and Alibaba Days later, the initial public offering competition Consumers would suffer the same consequences, with fewer options and less trade rights 2.2.3 Amendment of regulations to China’s Anti-Monopoly Law Overall, the law introduces new rules that impose stricter penalties for violations and bar big tech companies from using their dominating market position to push smaller vendors into participating Sign exclusive business contracts The Amendment went into effect on August 1, 2022 It is a significant step forward in Chinese antitrust enforcement The following are the Amendment's more notable features: Significantly enhanced penalties for AML violations, including the introductionoffinesforindividuals The AML provides that a monetary fine of 1% to 10% of the previous year’s turnover shall be imposed for such violations The Amendment raises the maximum fine from RMB 500,000 to RMB million (or approximately) for companies that have entered into but have not yet implemented an anti-competitive agreement, and for trade associations that organize anti-competitive agreements among their members, and adds personal liability by imposing a fine of up to RMB million on individuals who are responsible for violating AML's prohibitions against certain monopoly agreements The Amendment significantly increases the penalty for failure to file a reportable merger from a maximum of RMB 500 thousand (about USD 75,000) to RMB million (approx USD 750,000) If parties fail to file a transaction that the Chinese antitrust authority decides raises serious competition issues, they may incur a penalty of up to 10% of their previous year's revenue The introduction of a discretionary “stop-the-clock” mechanism for merger reviews This mechanism enables the authority to suspend the AML merger review timeline at its discretion in specific situations—for example, if the filing parties fail to submit documents and materials as required; if new circumstances and facts with a potentially major impact on the merger review emerge and need to be verified; or if the parties’ proposed remedies require additional evaluation (and, in that situation, the parties request a pause in the timing) The codification of a burden-shifting framework created by China’s courts that gives companies the opportunity to defend resale price maintenance agreements The Amendment clarifies that an agreement that limits or fixes resale prices will not be prohibited under the AML if the parties can prove that it does not have the effect of restricting or eliminating competition This codifies the stance of China's Supreme People's Court, which has stated that RPM agreements are presumed to be illegal unless the defendant can demonstrate that the agreement is not anti-competitive under the AML This legislative move reflects a potentially substantial departure from the customary approach of Chinese antitrust enforcement agencies, which traditionally considered resale price maintenance to be illegal in and of itself New safe harbor and burden of proof provisions for matters involving verticalagreements The new safe harbor and burden of proof provisions for matters involving vertical agreements aim to provide clearer guidelines and more certainty for businesses operating in the country Under the safe harbor provision, vertical agreements that meet certain conditions will not be considered anti-competitive and will be exempt from antitrust scrutiny To be eligible for the safe harbor, the vertical agreements must not involve price fixing, market allocation, or output restrictions, and the market share of the parties to the agreement must not exceed certain thresholds The burden of proof provision, on the other hand, shifts the burden to the antitrust authorities to prove that a vertical agreement is anti-competitive This means that businesses entering into vertical agreements will have more protection and will only be subject to antitrust action if there is clear and convincing evidence that the agreement has anti-competitive effects Overall, these new provisions aim to strike a balance between promoting competition and protecting businesses from overly strict antitrust regulations They also align China's antitrust laws more closely with international best practices and provide more clarity for businesses operating in the country Specialfocusonkeysectorssuchasthedigitaleconomy The Amendment does not change the standards for determining “dominance” or an “abuse of a dominant market position” under the AML However, it adds language to the AML that is focused on the practices of tech companies For example, the Amendment includes "General Principles" that ban corporations, regardless of whether they are deemed "dominant," from engaging in anti-competitive behavior using data, advantages, or platform regulations algorithms, technology, capital It further states that a "dominant" corporation can be deemed to have misused its dominant market position if it utilizes data, algorithms, technology, or platform regulations in a way that undermines competition ("capital advantages" are not mentioned in this context) Government restrictions onthecompetition:the“FairCompetitionReview” scheme The Amendment incorporates China's Fair Competition Review process, which oversees rule-making behavior by government agencies, into the AML to ensure that government laws and policies not impose unjustified barriers to competition The Fair Competition Review scheme aims to expose government laws, regulations, and policies to antitrust assessment before they are promulgated To minimize or decrease harmful effects on competition, the competitive implications of such a plan are analyzed, any grounds for limits are recognized, and less restrictive options that would meet the intended public policy purpose are offered The plan was initially formed in an Opinion by China's State Council in 2016, and full implementation guidelines were adopted in 2017 It is now explicitly enshrined in the AML The impact of the Anti-Monopoly Policy on E-Commerce market in China 3.1 Market competition The antitrust law published in 2021 by the Chinese government had brought positive effects on both Alibaba’s users and this corporation’s competitors in the e-commerce market To be more specific, before the establishment of this regulation, its “choose one from two” policy of Alibaba did not allow their sellers to run their business on other online shopping platforms, which was stated to harm the competitive environment and even limit the customers’ range of choices With this action of authority, the market share of Alibaba decreased from 55,9% in 2019 to 44% at the end of 2021, leaving more space for other companies such as JD and Pinduoduo to expand their businesses To be precise, Pinduoduo’s market share in 2019 was only 7.3%, but this number nearly doubled at the 2021 year end to a percentage of 13.5% (Next-ren, 2020 and Statista, 2022) 3.2 Alibaba As stated in Colino’s article (2022), besides the fine, Alibaba must take self-correct actions by providing three years' worth of self-assessment compliance reports, refraining from using technology to engage in anti-competitive behavior, disclosing any mergers that exceed the applicable notification thresholds, and defending the rights and interests of consumers These changes in the company’s practices may raise compliance costs and lead to poorer business performance Additionally, the fine Alibaba had to pay shows the protection of the government for domestic small and medium enterprises against tech giants Moreover, the unpredictable changes in the legal system of China, especially policies to restrict the influence of corporations, could be seen as a threat when it comes to investors’ points of view and therefore, limit the capital for the development of the company in the future Furthermore, Alibaba has also shown symptoms of losing its global position due to competition from the burgeoning social commerce startups and China's anti-monopoly law (Statista, 2022) As the data shown by Companies Market Cap, in 2020, Alibaba's market value reached its highest point at $837.84 billion while this index of 2022 had dropped to $237.8 billion, or approximately 75% less than its peak Figure1.MarketvalueofAlibabafrom2014to2023(CompaniesMarketCap,2023) Alibaba’s risk management policy According to the company’s Fiscal Year 2020 Report, the Anti-Monopoly Law has been identified by Alibaba as a risk factor that could result in financial penalties, commercial restrictions, and reputational damage Alibaba has been obliged to alter several practices and restrict business activities as a result of AML allegations and claims made by rivals, business partners, and customers in recent years, even though doing so will result in lower revenue and net income due to the company's declining popularity As might be expected, after the violation of AML, these risk management policies have been highly pushed forward In 2023, Alibaba intends to restructure by dividing the conglomerate into six separate businesses and fundraising for most of these divisions (Banerjee, 2023) This effort not only helps Alibaba to defend themselves against further regulations related to monopolistic behaviors but also sets up a chance for each business unit to maximize its efficiency and profitability IV RECOMMENDATIONS The regulatory risk landscape is shifting Many companies are caught up in the ever-changing priorities of governments and authorities globally Regulation contraventions can not only result in significant fines, and reputational damage but can require substantial changes to the way a company operates and interacts with its customers Therefore, regulatory risk management is an essential part of risk management However, many companies not take regulatory risk management seriously Alibaba has paid their price for lack of concern for regulatory risk From this case, other firms should learn to keep track of regulatory changes to ensure compliance with the new or the updated regulations related to their business To mitigate regulatory risk, we suggest that companies (1) Identify activities, services and products to know whether any regulators set the rules for those areas; (2) Identify regulators and regulatory requirements as per different industries and different nations because their requirements varies from nation to nation, industry to industry; (3) Update, track and monitor regulatory changes to ensure compliance Regulators can regulate new laws or change the old ones If companies fail to comply, regulators can impose sanctions; (4) Assess risks of noncompliance and know the minimum, maximum fine; (5) Review risk management framework to ascertain that it is effective and up-to-date as any new operations or change of regulations pose involve regulatory risks Outsourcing regulatory risk management is another option for firms Companies can hire third parties who are specialized in regulatory risk management They will identify risks and deliver end-to-end solutions effectively which help their clients focus on their core business Besides, software can ease the burden of risk management Companies could purchase suitable software to assist their risk management department V CONCLUSION Regulatory risk is a major risk that most companies face, it leads to significant fines, reputational damage, comparative disadvantage, operational disruptions, etc As a result, all companies need to develop their own strategy to limit regulatory risk impact This report has reviewed and clarified some theoretical issues about regulatory risk such as the definition of regulatory risk, regulatory risk management, factors contributing to regulatory risks and its consequences Analysis of the case of Alibaba is also done to see the impact of the antitrust law of the Chinese Government on Alibaba Enterprise and Alibaba’s reaction to the government's acts China’s legislature released the final version of the revised Anti-Monopoly Law (AML) which makes several major changes and additions Alibaba was then fined $2.75 billion, forced to disclose their business activities and refrain from anti-competitive technology for behaving like a monopoly This led to a decrease in the market share of Alibaba, which leaves more space for other companies to expand their businesses Alibaba reacted to this anti-monopoly policy by adding anti-monopoly regulations as a risk factor that could result in financial penalties, commercial restrictions, and reputational damage In 2023, Alibaba intends to restructure by dividing the conglomerate into six separate businesses and fundraising to defend themselves against further regulations related to monopolistic behaviors Further, this report stresses the importance of regulatory risk management and proposes two options of risk management system - outsource and in-house regulatory risk management Crucial steps in regulatory risk management are also recommended to companies with in-house regulatory risk management departments in the recommendation section