12/23 Tech Buzz China Insider Digest
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Insider Digest 12/23/21: Viya’s $210mm Mega Tax Fine and What It Means for Livestreaming, Bilibili’s Bubble & Subsequent Burst, AliCloud’s Suspension from MIIT Threat Group
Housekeeping / Announcements:
First and foremost, happy holidays! We’ll be taking the next two weeks off but I’ll still be checking in intermittently on Discord and Twitter. Please stay safe from omicron and all the other COVID variants!
That’s really it … just want to thank you all for sticking through with us this first year of the community. I’ve learned so much from all of you, and I have very high hopes for the next year! We’re always open to any feedback so you can always ping me directly or anonymously! Thank you again for all of your support! We really love having you here!
Here are our articles for the week! I ended up not writing about the Beike rebuttal to Muddy Waters short report because it was so clear MW had messed up. Beike is still a risky company in a sector with immense headwinds but the MW allegations of fraud were unfounded. According to our partner BigOne, MW’s data collection methods for Beike were deficient, BigOne had looked at it as well and decided they couldn’t use it. Anyway, it’s still possible Beike has other issues, but the ones alleged in the report are not it.
12/21/21 Viya’s $210mm Record Tax Fine & What It Means
For a whole week, the Chinese-speaking internet was hooked on the divorce scandal of goody-two-shoes but actually serial adulterer and regular prostitution customer Wang Leehom. (Don’t believe me? Politicians blamed the low turnout and subsequent failure of the Taiwanese referendums on it.) But then he was miraculously saved from further public wrath by an even bigger scandal ... China’s top e-commerce livestreamer Viya’s historic, jaw-dropping $210mm ($1.34Bn RMB) fine for tax evasion.
Here are the facts of the case:
From 2019 to 2020 (seemingly just through October), Viya evaded $100mm in taxes by hiding and swapping incomes (the same thing fellow livestreamers Cherie and Sunny were in trouble for just a month ago, although they owed just $15mm total), and simply didn’t pay another $10mm or so in taxes
Basically, Viya should have been paying a personal tax rate of 45% for her income bracket (which she apparently began to in November 2020). Or alternatively, a few tax analysts have said she could theoretically be paying via a corporate structure of ~35%. (I’m not sure of the veracity of this latter statement.) Instead, she was paying an effective tax rate of something like 0.8-3% by illegally dividing her income into numerous fake shell sole proprietorship companies in special tax jurisdictions (such as Chongming island in Shanghai) and then (probably) engaging in faked transactions.
The extra $100mm in fines came from the fact that she cooperated with the investigation and proactively paid about $78mm in evaded taxes, so this part was only given a fine of 60% ($47mm). However, the parts that she didn’t proactively turn in were given a penalty of 4x, and there were other parts that were less minor that were given a penalty of 1x.
Don’t think she wasn’t warned though ... she was apparently repeatedly warned by the authorities and failed to fully correct her misbehavior (the implication being that she did correct some).
Click through for more … including my arithmetic of how livestreaming GMV may be inflated by as much as 5x
12/22/21 Alibaba's Suspension from MIIT Threat Sharing Platform
Thanks to everyone who asked a lot of questions yesterday on the Discord about the latest news that Alibaba Cloud was suspended from MIIT's threat sharing platform for the next six months for failing to report the now infamous Log4j vulnerability to the government. SCMP, Reuters (and probably others) linked this to a potential threat to Alicloud's future government business, which I think is overblown and shows a fundamental misunderstanding of both the "crime" and the "punishment." Sensationalism journalism at its best, I guess. I learned a lot from trying to answer everyone's questions, so I figured it's worth jotting down a summary for those interested.
The key piece here is that a set of guidelines* were issued effective 9/1/21 by MIIT requiring the following:
[F]or the security vulnerabilities in their (internet product companies') upstream products or components, they should immediately notify the relevant Product provider. Alibaba actually did this on 11/24/21, reporting the Log4j vulnerability to the Apache foundation, the product provider.
The relevant vulnerability information should be reported to the network security threat and vulnerability information sharing platform of the Ministry of Industry and Information Technology within 2 days. The content of the submission should include the product name, model, version, and the technical characteristics, harm, and scope of the vulnerability that have security loopholes in network products. Alibaba did NOT do this. MIIT found out on 12/9/21, same time as everyone else in the world. By these rules, the latest they should've been informed was 11/26/21 (assuming the vulnerability was discovered and reported to Apache on the same day).
SCMP had written that these guidelines only "“encourages” companies to report bugs found in others’ software." Untrue and a gross misreading of the guidelines! You are required to report the vulnerabilities if you are a "network products" provider or 网络产品提供者. Pretty clear that Alibaba would fall into this category?
12/21/21 Bilibili's Bubble and Subsequent Burst
This is not an original post but the summary of a (very) long post from an internet analyst I like to read — Pei Pei. He’s a really big gamer so I always read his posts on gaming businesses with interest, and because he was early as a knowledge economy influencer in China he’s also got some really good insights on the development of the creator economy there. Both of these, in my opinion, make him a credible resource on Bilibili, albeit a very negative one. I tend to agree with him on Bilibili ... I’m on the more skeptical side of the company’s chances to expand beyond its Gen Z anime-loving demographic (which btw might itself be at odds with each other, as explained below). Either way, here are some anecdotes and generalizations that reflects what I consider to be industry consensus about the company’s culture and lack of operational excellence, which doesn’t always seem to be well-known to those outside China. Please do take them with a grain of salt.
First of all, for those who haven’t been paying attention ... Bilibili’s YTD performance has been dismal. -53%, of which I think not much can be fairly attributed to the overall ADR pullback. (It’s actually down 72% from all time highs). Clocking in at just $17Bn in market cap, it’s still got a pretty comfortable cushion relative to the “$10Bn” that CEO Chen Rui has designated as the minimum viable clearing price for an internet company, but ... tsk tsk tsk, this is a far cry from the $50Bn it was cresting over just 9 months ago.
Why? The core argument Pei makes is that Bilibili’s entire upper management is weak. (Specifically he has gripes about the COO Carly Ni Li, now a 35-year old female self-made billionaire). And the reason for that is two fold — 1) Bilibili has gotten incredibly lucky up until now, 2) because it’s been so lucky, it’s never gotten good at the hard skills required of Chinese internet, especially gaming companies: operations.
Have any comments or questions? See you on the Discord server!
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