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China tech

Meituan squeezed by Xi's tech crackdown and prosperity drive

Regulatory pressure on food delivery leader has echoes of Alibaba's humbling

Meituan delivery workers sanitize their scooters in Beijing. The company counted 9.5 million drivers at the end of 2020.   © Reuters

SHANGHAI -- From a potential $1 billion fine to Xi Jinping's campaign for "common prosperity," Meituan, the operator of the China's top food delivery app, faces mounting government pressure on a business model that has made it one of the country's most valuable tech stocks.

Meituan's predicament parallels that of e-commerce leader Alibaba Group Holding, whose market value has taken a blow from Beijing's crackdown on the data-rich giant after outspoken founder Jack Ma is said to have angered Xi by criticizing China's financial system.

Meituan Chairman and CEO Wang Xing, known for not mincing words, struck a conciliatory tone at an earnings call last month. He pledged Meituan would stop putting pressure on merchants and pay more attention to delivery staff's working conditions.

Hong Kong-listed Meituan has come under scrutiny from Chinese authorities several times this year. After an antitrust probe in April, Wang the following month posted a Tang dynasty poem on social media about an emperor's attempt to quell dissent, which was widely interpreted as a criticism of the Xi's leadership.

Wang has also spoken out against Alibaba, which had helped Meituan get off the ground. The e-commerce group was an early investor in Meituan, which Wang founded in 2010 after studying business and online services in the U.S. But clashing visions ended the companies' partnership in 2015, and Wang has publicly criticized Alibaba's strategy since then.

Wang's confidence stems from Meituan's meteoric rise. China's growing online sector drove the company to expand beyond food deliveries and into travel reservations, online reviews and more. It received an investment from Alibaba rival Tencent in 2015, and raised 32.5 billion Hong Kong dollars ($4.14 billion at the time) when it debuted on the Hong Kong stock exchange in 2018.

Meituan now counts over 600 million users. Though it logged a 3.2 billion yuan ($496 million) operating loss in April-June, profits in its food delivery and travel services almost doubled on the year. The company had warned in March that it could remain in the red for a while as it invests in future growth.

But the company now confronts a trio of unexpected challenges.

Meituan is said to face $1 billion antitrust fine for pressuring merchants not to do business with rival platforms. The company "could be required to make changes to its business practices and/or be subject to a significant amount of fines," it said when announcing April-June results.

Meituan held 71.3 billion yuan in cash and cash equivalents as of the end of June, meaning even a fine of this size is unlikely to trigger a cash crunch. Still, its competitiveness could suffer if popular merchants switch to rival delivery services.

Xi's call for "common prosperity" -- narrowing the wealth gap for a fairer, more prosperous society -- also creates headwinds for Chinese tech giants like Meituan. Many food delivery workers do not qualify for workplace insurance or a guaranteed minimum wage. Meituan, Alibaba and eight other online services companies on Friday were told by regulators to protect the rights of gig workers.

"Common prosperity is built in the genes of Meituan," Wang said in August, outlining plans to improve conditions for delivery workers. But doing so for its entire fleet, which totaled 9.5 million workers as of the end of 2020, would be a drain on Meituan's earnings. Alibaba rival suffered a roughly 90% drop in net profit on the year in the April-June quarter after improving pay and benefits for its delivery workers.

Meanwhile, regulatory walls are closing in on areas Meituan looks to for new growth.

Community group buying, where entire communities band together to purchase groceries and other goods in bulk for cheap, has taken off in China during the coronavirus pandemic. Like other internet companies, Meituan has invested heavily in this field.

But Chinese authorities imposed a fine on the company and other players in March for unfair pricing, concerned that cheaper prices made possible by the community based model could squeeze small, conventional grocers.

Even with such regulations, Meituan remains confident in the long-term growth prospects for community e-commerce, Wang said. But some companies operating in this service have suffered layoffs and bankruptcy this year, Chinese media report.

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