Layoffs at Chinese internet giants are an indication of a deeper dilemma – Analysis – Eurasia Review

By He Jun*

There has been the intensifying wave of layoffs in Chinese internet companies, where JD.com is becoming the center of attention.

According to a document circulating online, the JD.com layoffs span a wide range of industries. The e-commerce company’s subsidiaries such as Jingxi, JD Worldwide, JD Retail, JD Logistics and JD Technology have set layoff rates, most of which are between 10% and 30%, with the proportion of layoffs in Jingxi Guangdong being even equals high up to 100%. Some media quoted senior JD.com officials as revealing that the layoffs had indeed begun. According to reports, March 31 is the deadline for this round of layoffs. On the other hand, JD.com said it was just “normal optimization” from the corporate sector.

Notably, JD.com is not alone among Chinese internet companies to suffer major layoffs. Alibaba, Youzan and other tech heavyweights also said they have taken it to scale. If a single company sees a large number of layoffs, it might just be that company’s problem. Still, there have been centralized layoffs at large companies, indicating that this is an industry-wide problem. Some analysts believe that China’s Internet industry has begun to experience downward cyclical pressure, and most of these companies have slowed down or even suffered losses.

ANBOUND researchers pointed out that in the historic layoffs of Chinese internet giants, the pressure mainly comes from two aspects. First, in the current environment, China’s economic growth continues to slow and consumption has been sluggish, which has hurt the business of these tech companies. Second, there is pressure from regulators, which is causing some of these companies to change their business activities.

However, in a larger context, this actually reflects a problem within the Chinese economy, not just the internet industry. In recent years, China’s Internet industry has been supported by both the capital market and the consumer market. The Internet is a sector highly sought after by international and national capital, thanks to the enormous market potential. China has 1.4 billion people, and such a large market is undoubtedly an important factor in supporting the development of the country’s Internet industry.

Compared with other sectors, China’s Internet industry has obtained abundant resources, including various types of investment, financing, policies and markets. It is obviously a district very popular with the capital. However, the process of accumulating resources for the Internet industry most often generates superficial prosperity, and does so at the cost of depleting resources from the real economy. A clear example is that while e-commerce is booming, physical stores are closing one by one.

Now it’s the internet industry’s turn to run into its own problems. There have been fewer capital inflows, while more outflows have occurred. Moreover, the recovery of China’s domestic consumption has been slow. All of these, coupled with the authorities’ continued introduction of industry rectification policies, have affected the industry. The case of JD.com shows that the so-called capital flow is actually the withdrawal of capital by investors, which has an impact on the capital market. This in turn affects listed companies and the industry as a whole, consequently affecting demand, consumption and the market. The end result is business closures or dissolutions, unemployment, and a large number of businesses that exist in name only. When problems like this arise in different parts of the chain, the problem cannot be solved simply by adjusting the GDP data.

We believe that the performance of Chinese tech heavyweights over the past two years is not entirely the problem of Internet companies. In fact, the decline of the country’s economy began long before the outbreak of the COVID-19 pandemic. In the context of the economic downturn, Internet companies with relatively concentrated resource accumulation began to be considered the safest places. Unless the market failed, Internet companies would not fail. Yet it also means that the whole system could collapse when the elements that support it don’t work properly.

*He Jun, Partner, Director of the Chinese Macroeconomic Research Team and Senior Researcher. His research area covers China’s macro-economy, energy industry and public policies.

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