Xi Jinping breaking up Chinese tech giants into smaller parts is making Google and Apple very happy.

China, with its $18 trillion economy and 1.4 billion population, has one one of the most fledgling tech economies in the world. However, its internet giants, as mammoth as they are, are much smaller than most major American tech companies like Alphabet, which is worth $1.3 trillion. 

Alibaba, one of China’s largest conglomerates, has recently announced plans to break into six parts due to lower-than-expected growth in valuations and several regulatory issues. This could be good news for investors, but top US tech companies like Apple, Microsoft, and Alphabet, with their combined worth of $8 trillion very happy.

Also read: Chinese tech giant Alibaba to split into six groups, separate IPOs expected

Chinese tech conglomerates to be broken up
Chinese tech companies such as Alibaba, Tencent, and Baidu have seen their combined market capitalization drop by more than half due to regulatory crackdowns by President Xi Jinping.

In February 2021, the total market valuation of the eight most famous Chinese tech index companies Alibaba, Tencent, Meituan, PDD, JD.com, NetEase, Baidu, and Xiaomi was more than $2.5 trillion. 

Access to cheap capital helped pioneers such as Alibaba’s Jack Ma in rapidly diversifying and constructing vast enterprises with global aspirations. But, concerned about monomaniacal executives, monopolistic behaviour, misusing user data, and opaque financial risk, President Xi Jinping moved to reign in China’s tech industry.

Also read: Jack Ma returns to China as the government tries to allay private sector fears

Why is American Big Tech happy?
Large tech companies can easily skim profit from stable businesses and invest in taking expensive experimental technologies. Alphabet’s R&D budget was $40 billion in 2022, which is 11 times higher than China’s search monopoly Baidu, which is also trying to become an AI powerhouse.

Breaking up conglomerates like Alibaba could boost valuations and help to reduce regulatory risk. However, it could also lead to a loss of economies of scale. Shareholders in Alibaba’s cash-cow e-commerce unit may not want to fund risky bets in the company’s cloud computing affiliate. Moreover, with the influx of AI-based applications, China’s tech companies would have surely wanted to invest a large part of their corpus in beating each other to the company.

The fact that Beijin doesn’t want them to invest in AI, not for the general public at least, is another reason why the conglomerates had to be broken up.

American tech companies moving into China’s territories
Meanwhile, US tech giants generate three times more revenue and nearly five times more free cash flow than their Chinese competitors. Alphabet and Meta Platforms, with their large cash reserves, are expanding into Southeast Asia, where Chinese companies once hoped to gain share. 

Also read: AI frenzy: Chinese tech firms are scrambling to make AI generative bots like ChatGPT

Consider this – up until a few years ago, it was brands like Xiaomi, Oppo and other local players who dominated the smartphone market. Today, however, Apple is the highest-selling smartphone brand in China. China also happens to be one of Apple’s biggest markets, outside the US.

President Xi may be pleased to reduce the size of China’s tech companies, but their American rivals will likely enjoy watching this unfold.

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