Government Intervention in Competitive Pricing
President Xi Jinping is urging China's technology companies to cease their aggressive price-cutting strategies, which have led to intense competition and are now drawing the attention of regulators. Platforms have been continuously slashing costs to gain market share, prompting government intervention.
Beijing aims to prevent a recurrence of businesses heavily subsidizing users solely to capture market share. This initiative is particularly significant given the ongoing deflationary pressures on the economy, with prices declining for over three consecutive years.
The State Administration for Market Regulation (SAMR), China's primary watchdog, is systematically addressing companies. Initially, the focus was on food delivery services. This week, SAMR announced an investigation into Ctrip, China's largest online travel booking platform.
Ctrip Under Investigation Amidst Broader Regulatory Push
Ctrip is now the subject of an official investigation, as announced by SAMR on Wednesday. This action follows earlier probes into Meituan and Alibaba's delivery businesses, indicating a wider regulatory effort.
Regulators are attempting to curb what is described as "involution"—a situation where companies engage in price wars and offer extensive discounts purely for survival, often lacking sustainable long-term strategies. This phenomenon is prevalent across various Chinese industries, including technology, electric vehicles, and solar panels.
Trip.com, the Hong Kong-listed parent company of Ctrip, experienced a significant drop of over 20% in its stock value over the past week. In response, Ctrip issued a statement affirming its commitment to cooperate with the investigation and confirming that its daily operations remain unaffected.
SAMR's renewed enforcement activity follows a period of reduced regulatory pressure after the tech crackdown in 2021, which allowed companies some breathing room. However, experts note that SAMR appears more confident in its current actions, despite ongoing staffing limitations.
Consequently, instead of initiating complex legal cases, SAMR is opting for direct engagement with executives, issuing warnings, and seeking public endorsement for its efforts from the State Council, China's highest governmental body.
Food Delivery Price War Escalates Regulatory Response
The food delivery sector has been a focal point for intense competition. Last year, Alibaba and JD.com entered Meituan's market, triggering a wave of discounts and subsidies, including reduced prices on food and free beverages, which led to substantial financial losses for the platforms and forced restaurants to lower their prices.
In response, regulators convened a meeting with the platforms in July, urging them to de-escalate the price war. However, the competitive battle continued throughout the summer with ongoing subsidies. One executive noted the difficulty in ending the price war without significant government fines. Officials, however, are cautious due to the large number of jobs supported by these companies and their importance to thousands of restaurants, especially amidst a challenging job market.
Chelsey Tam, an analyst at Morningstar, observed that while the deep discounts appear to be subsiding, the delay in resolution highlighted the strained relationship between the tech industry and regulatory bodies, indicating high tensions.
The situation intensified last month when SAMR officials visited PDD Group's Shanghai offices to investigate pricing practices and the treatment of suppliers. Reports from local media suggest a physical altercation occurred between PDD employees and SAMR regulators during the inspection.
According to an anonymous source, SAMR perceived PDD's conduct as arrogant, a stance that could lead to more severe repercussions. Although no fines have been announced yet, PDD could face further action if its behavior persists.