After the collapse of the Qin Dynasty China was divided by a factional conflict. Two powerful warlords emerged: Xiang Yu of Chu and Liu Bang of Han. For four years, the two men were locked in bitter battles. Although Han forces won many victories, they still didn’t control most of the country as much of eastern China was under Chu control. It wasn’t until 202 BC and the Battle of Gaixia that Han won decisive control. After this Liu proclaimed himself ‘Emperor of China’ and established the Han Dynasty.
The latest developments in China’s e-commerce sector are beginning to look like a similar struggle for control between two men: Alibaba’s Jack Ma and Tencent’s Ma Huateng. Over the past year, they have been moving aggressively onto each other’s turf. And the battle of the Mas escalated last week, when Tencent announced that it was spending $195 million for a 10% stake in China South City (plus the option to increase its stake to 13% within the next two years). China South City operates warehouses and factory outlet malls, as well as providing logistical services to retailers.
Analysts say the deal makes sense for Tencent – which has long dominated China’s social networking market with products like QQ and WeChat – since it will use China South City’s logistics infrastructure to expand its foothold in e-commerce. Tencent was comparatively late to e-commerce but has been trying to catch up with Alibaba, the undisputed leader. By the third quarter of last year, Tencent had market share of 6% in the business-to-customer (B2C) sector, trailing Alibaba Group’s Tmall (which controlled 51%) and Beijing-based 360Buy (17.5%).
Tencent says the deal will also help small and midsize companies develop their own online retailing operations. “Chinese small- to-medium-sized enterprises have huge demand to expand their businesses online,” says Martin Lau, president of Tencent. “Cooperation with China South City enables us to help them migrate online, utilising [its] physical locations and logistics together with Tencent’s internet user platforms and technology capabilities.”
Alibaba, which also controls the largest consumer site Taobao, is beefing up its own logistical network too, announcing a Rmb100 billion ($16.5 billion) investment over the next five years in more than 2,000 warehouses around the country. Rival 360Buy is also frantically building its own logistics capacity.
Zhang Yi from iiMedia Research told China Business News that e-commerce firms that rely on third-party logistics platforms will struggle with bottlenecks – so controlling their own distribution is going to be critical.
Even before Tencent’s latest shopping spree, Jack Ma was feeling the competitive heat from its rival. In October, the chairman of Alibaba Group announced that he was shutting down his personal account on WeChat and urged his online followers to do the same by switching their allegiance to a new Alibaba messaging service called Laiwang.
Ma also sent a memo to all Alibaba employees telling them to find 100 new Laiwang users from outside the company – or not get their annual bonuses.
More recently Alibaba announced plans to set up a mobile gaming platform which will offer applications developed by outside programmers, sharing revenues with them. The move puts it into direct competition with Tencent, one of the largest online game publishers.
“We’ve seen both companies increase investment in the territory dominated by the other,” Guosen Securities analyst Bill Fan told the South China Morning Post. “Competition between them can be expected to be more intense in the next phase.”
For Alibaba, rumoured to be close to launching its much-anticipated IPO, the timing of the China South City deal is annoying. “Tencent’s every move affects Alibaba. So if investors becomes worried about the competition, it could really hurt Alibaba’s valuation when it starts its IPO process,” warns China Business News.
In the meantime, investor interest in the logistics and warehousing sector seems vibrant. When Kerry Logistics, an arm of Kerry Group, went public in Hong Kong last month, it raised $282 million and was oversubscribed three times in the international tranche, says the South China Morning Post.
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