Caixin
Mar 25, 2014 06:19 PM

Why Alibaba Fears Tencent's Online Incursions

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Alibaba Group chairman Jack Ma (left), Tencent Holdings chairman Ma Huateng (right) 


(Beijing) – Tencent Holdings is using its popular social networking app WeChat to push even deeper into the e-commerce territory dominated in China by Alibaba Group.

Analysts say Tencent's latest moves have forced Alibaba, which runs the Tabao B2B and Tmall B2C shopping websites, to rethink its mobile e-commerce strategy.

WeChat expanded its social network app on March 4 to include a merchant payment service for 20 kinds of retail businesses – from cosmetic vendors to book sellers. Now, an app user who uses it to link their device to a personal bank account can buy goods from any merchant with a WeChat storefront.

The move followed Tencent's successful push in February into the online payment business territory held by Alipay, a payment service owned by Zhejiang Alibaba E-commerce Co. which is closely related to Alibaba Group. Millions of WeChat users signed up for its payment service during a "red envelope" Chinese New Year campaign. The service let them give money to relatives and friends as traditional gifts through bank transfers, rather than by handing them actual red envelopes stuffed with cash.

These incursions by Tencent have nagged Alibaba's chairman, Jack Ma. In an email to employees on February 28, Ma said that he is not afraid of WeChat. But he expressed disappointment in his company's app business performance and called for a better defense of its territory.

Alibaba is the country's largest e-commerce company by sales. But Tencent, whose forte is social media, is using the foundation of user base to challenge Alibaba's leadership, analysts say.

"I'm not so worried about WeChat's red envelope ... or not being able to develop killer products like it," Ma wrote. "I'm worried about us getting lost in the competition and forgetting to do the things we are good at."

In a defensive strike in February, Alibaba successfully thwarted WeChat's access to Taobao, Tmall and the Alipay payment service. All WeChat payment requests were blocked. Ever since, WeChat users who follow online links to products and shops are prompted to download an app for Taobao or Tmall.

Alibaba has been expanding this defensive posture since last fall – for good reason.

Analysts say Tencent wants WeChat, which as of the last quarter in 2013 said it had some 355 million users, to serve as a foundation for an entire ecosystem of mobile e-commerce products.

Tencent and Alibaba share a strategy for mobile e-commerce development. Both companies want to build platforms that support mobile Internet payments to online businesses as well as brick-and-mortar stores, analysts say. The difference is that Tencent's strategy includes the goal of dethroning Alibaba.

Widening the Field

By inviting companies to set up WeChat storefronts and then developing online payment services, Tencent transformed what had been a messaging, voice recording and photo-sharing app into a B2C platform that competes with Tmall. The service builds on Tencent's experience with the Yixun e-shopping website, which the company acquired in 2012.

The move also broadened business opportunities for a variety of Internet-service companies, merchants and financiers. Industry players could thus invest in new businesses, form alliances and merge with competitors.

For example, Sina Weibo, the country's version of Twitter, signed a contract with Alibaba in January to launch a payment service via the former's app. Tianhong Asset Management Co. worked with Alibaba and Zhejiang Alibaba on an online fund investment service called Yu E Bao in June 2013. Now Tianhong has surpassed China Asset Management Co. Ltd. as the largest fund management company due to huge popularity of Yu E Bao.

Tencent stock trades on the Hong Kong exchange. Alibaba is eyeing a possible initial public offering this year on the New York Stock Exchange.

To attract stock investors, says a source close to Alibaba who asked not to be named, Alibaba plans to set its business goals on cloud computing, data business and acquisitions. These would complement its existing e-commerce platforms and take investor eyes off the company's rivalry with Tencent.

"Alibaba's next strategy is to unleash the potential of its database, payment system and cloud computing technologies to attract more offline vendors and incorporate their resources within its ecosystem," the source said.

From the company's perspective, the source said, pursuing businesses not related to apps makes more sense than going head-to-head with Tencent.

Indeed, in 2012 Alibaba launched a WeChat-like app called Laiwang that analysts say pales in popularity. Alibaba won't say how many people use Laiwang, but it's thought the user base is only a fraction the size of WeChat's.

One Alibaba advantage is that it has accumulated a significant amount of data from its estimated 300 million users of Taobao, Tmall and Alipay.

The company has adjusted its structure for this objective, a source close to Alibaba said, because it wants to "consolidate departments that have businesses on the mobile (Internet) end, integrating projects that focus on the user system, vendor system and operating system."

Furthermore, Ma's recent email to his staff underlines a change of direction for the company, said an investor familiar with Alibaba.

Alibaba recently formed a new division to support brick-and-mortar businesses including retailers and their customers through advertising, coupons and payment services. Its clients to date include Meiyijia, the country's largest convenience store chain, Beijing Wangfujing Department Store Group Co. Ltd. and Wanda Cinemas.

Strategic Shifts

Meanwhile, Tencent has been encouraged by WeChat's rocketing popularity and is rejiggering its business. For example, the company is expanding its efforts to act as a go-between connecting businesses, services and customers with one another.

Tencent can control the services that are active on its platform by buying stakes in companies it likes, analysts say. It has already done so. For example, Tencent in 2013 invested US$ 448 million for a 36.5 percent stake in the apps and search engine provider Sougou Inc. And in March, it agreed to buy 15 percent of China's second largest e-retailer JD.com Inc. for US$ 215 million.

Tencent plans to transfer to JD several of its e-commerce units, including the logistics teams of B2C site QQ Wanggou and customer-to-customer shopping site Paipai.com. It will also give JD a minority stake in Yixun.

Analysts say JD will benefit from Tencent's support as it prepares for an initial public offering in New York expected later this year. Moreover, JD will coordinate its efforts with WeChat.
 
Tencent is also banking on mobile Internet user interest in restaurant and business service reviews. The company bought a stake in a website that lets users post restaurant reviews called Dianping. It replaced a similar service tied to WeChat and expanded into online payment services for restaurant meals.

Analysts says Tencent's investment in Dianping underscores the company's effort to provide a platform for companies seeking clients, so that those companies can focus their attention on doing what they do best.

Tencent has also accelerated work on building WeChat into a platform for mobile e-commerce. Its new payment service for 20 kinds of retail goods can be used by any business that gets a WeChat service account and pays a 20,000 yuan deposit.

An online store can use WeChat to advertise and offer discounts, too. Meanwhile, app users can pay for these goods through WeChat's payment service. Although the rules may change in the future, the company said, for now individuals cannot apply for business accounts.

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