The primary aim of the ongoing cost-cutting measures is to return their businesses to profitability across the board.
The duo of Chinese multinational tech giants, Tencent Holdings Ltd (HKG: 0700) and Alibaba Group Holding Ltd (HKG: 9988), have seen slowing growth as the global economic shift becomes apparent. While both Tencent and Alibaba still dominate the tech scene in China, longer-term sustainability remains the most important focus for both firms at this time.
Per Alibaba’s second quarter results, a relatively flat growth was recorded, the first time the company’s earnings noticeably backpedaled. Tencent was not better as Q2 earnings slipped after it posted a year-on-year revenue slump. Both firms that typically rave about new products and technology in their earnings call, the emphasis this time was on cost-cutting.
The new focus is not a surprise as different tech behemoths have been impacted in different ways since the advent of COVID-19 to the invasion of Ukraine by Russia. Many may even consider the duo of Tencent and Alibaba to be late to the party as most conglomerates have been adopting targeted cost-cutting measures for quite some time.
The harsh regulatory climate in China has also contributed to Tencent and Alibaba focusing their growth strengths on their core businesses.
“During the second quarter, we actively exited non-core businesses, tightened our marketing spending, and trimmed operating expenses,” Tencent CEO Ma Huateng, told analysts during a call Wednesday. “This enabled us to sequentially increase our earnings despite difficult revenue conditions.”
Tencent said it exited such non-core businesses as online education, e-commerce, and game live streaming. Its cost-cutting strategy saw its marketing and general selling expenses fall by as much as 21% in the second quarter on a year-on-year basis. In what was notably unexpected, Tencent cut down its workforce by as much as 5,000 when compared to the headcount in the first quarter.
Tencent and Alibaba Cost Cutting Measures and Return to Profitability
The primary aim of the ongoing cost-cutting measures is to return their businesses to profitability across the board. With the resources concentrated on the business aspects that truly matter, growth initiatives can be enhanced, thus contributing to the general bottom line.
“In the coming quarters and the remainder of this fiscal year, we will continue to pursue the strategy of cost optimization and cost control,” Toby Xu, chief financial officer at Alibaba, said during the company’s earnings call this month.
With Tencent and Alibaba focusing on cost reduction across their business segments and operations, Winston Ma, adjunct professor of law at New York University told CNBC that this strategy will not be enough to guarantee a return to profitability. Rather, he said both tech giants must focus on new growth drivers.
“If you look at the cost initiatives they announced, some of the reductions are permanent, such as cloud migration and shutdowns of unprofitable noncore businesses, while others (marketing budget pullback and hiring slowdown) are more temporary in nature. So there’re multiple levers they can pull to create such balance,” said Ivan Su, senior equity analyst at Morningstar lauding Tencent’s cost-cutting measures.