Chinese tech firms’ search for growth seen boosting costs in March quarter

  • TECH
  • Thursday, 09 May 2019

A sign of Baidu is seen on a glass at its booth during the Digital China exhibition in Fuzhou, Fujian province, China May 5, 2019. Picture taken May 5, 2019. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT.

BENGALURU: Three of China’s biggest tech companies are expected to report that they ramped up or broadly maintained their pace of quarterly spending to develop new technology and push into relatively new markets, as current growth drivers stall. 

Used to rapid growth rates until recently, Chinese tech giants including Tencent and Baidu are seeking new revenue streams. But that has not come cheap as they shell out more to hire the best in a competitive job market and keep spending to attract customers in a slowing economy. 

Social media and gaming company Tencent, search engine provider Baidu and e-commerce firm are expected to report an average 42% jump in operating expenses in the March quarter compared with a year earlier, against a 19% rise in revenue, according to analysts estimates from Refinitiv. 

The exception – for the latest quarter at least – is Alibaba, China’s largest listed company, which is expected to cut operating expenses for the first time in its history as it tries to shore up its bottom line after a sharp drop in profitability in the year-ago period. 

"Competition is more intense and customer acquisition costs are increasing," said Jerry Liu, who heads the China Internet research team at UBS. 

"High quality users are more expensive to acquire than before, and newer users tend to spend less initially." 

Tencent, for instance, is looking for new sources of revenue in its nascent cloud services as it attempts to diversify from its core Chinese gaming business, which has been beset by regulatory problems. 

But such diversification helped push up its operating costs 46% last year, outpacing revenue growth of 32.5%. For the March quarter, the social media and gaming giant is likely to keep up the same pace of spending, pushing down net income by 14%. 

Revenue growth is expected to have slipped to 20%, the slowest in 15 quarters. 

Martin Bao, an analyst at ICBC International, said that while revenue could be unlocked in relatively untapped markets such as the older generation in top-tier cities and people in rural areas, returns from such investments would take time. 

"The user conversion price is much higher, but the profits will come slower ... the purchasing power of these users is much lower than existing users," he said. 

US counterparts are spending as well, but at a calmer pace. The big five – Apple, Facebook, Alphabet, Amazon and Microsoft – reported a 13% rise in operating costs on average in the March quarter as revenue rose nearly 10%. 

Wage pressure 

With rising wages lifting costs, some companies have responded by restructuring workforces – not just by cutting jobs but also by promoting younger staff to boost productivity. 

"Wages for tech workers in big centres like Beijing, Shanghai and Shenzhen are increasing," said Taipei-based technology analyst Sam Reynolds. "The jolt in wage increases has been substantial over the past five years and is creeping upwards." CEO Richard Liu recently berated "slackers" in his firm amid reports that the company, China’s second-largest e-commerce firm, has cut many jobs. 

It is scheduled to announce its March quarter earnings on Friday and analysts expect revenue growth of 20%, the slowest to date at a company that is yet to post an annual profit. It has aggressively clamped down on the pace at which its costs are rising and is expected to eke out a 9.3% rise in quarterly income. 

Baidu – which is trying to rebrand itself as a developer of artificial intelligence used in applications including self-driving cars – is expected to post an 82% surge in operating costs and a more than three-quarter slump in profit. 

Bucking the trend is Alibaba, which is estimated to have nearly halved costs in its fourth quarter ended March 31, helping it post an estimated 13.4% rise in net profit. The company is expected to boost spending again, starting in the September quarter. 

Alibaba and Tencent are due to report earnings on May 15 and Baidu on May 17. – Reuters

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