Going places

Well-travelled: Baidu’s Robin Li

Sun Tzu’s The Art of War is revered by corporate strategists as much as it is by military ones. Like most Chinese, Baidu’s founder and boss Robin Li likely knows its more famous pieces of advice. However, when it came to dealing with a business rival he eschewed Sun for a simpler adage. ‘If you can’t beat them, join them’ seems to be the strategy that the search giant has adhered to in its approach to the online travel industry.

In August Baidu-owned Qunar submitted an appeal to antitrust regulators to overrule Ctrip’s 36.6% purchase of online travel agency eLong. According to Caixin Weekly, Qunar was accusing Ctrip of failing to request a review from the Anti-Monopoly Bureau before closing the deal. But Baidu’s underlying intention was to prevent Ctrip from boosting its market position, it was speculated.

Qunar’s appeal wasn’t granted. Yet the news last week was that Baidu might not be quite the fan of free market competition it previously claimed. Instead it has opted to join ranks with Ctrip through an exchange of company shares. The deal they have struck transfers 25% ownership of Ctrip to Baidu and grants Ctrip a share of Qunar equivalent to a 45% voting right.

Ctrip and Qunar were already the top two online travel agencies in China. Under the new partnership they will control an estimated 61% of the market for flight bookings made online, and 41% for hotel rooms.

The news of the swap propelled Ctrip’s shares to surge higher, to trade at record levels in New York. The deal means that it is now the number one shareholder in its two major competitors, Qunar and eLong. It also gets an opportunity to expand its business through deeper cooperation with China’s dominant search engine.

For Baidu the goals are two-fold. Bringing Ctrip into closer cooperation with Qunar (the two will continue to operate as separate brands) should stem some of Qunar’s losses, which amounted to Rmb1.84 billion ($288 million) last year. But the primary objective is more strategic than financial in securing Baidu’s position in the fast-growing travel industry against rivals Alibaba and Tencent (the other two members in the so-called ‘BAT’ trio of internet powerbrokers).

Baidu’s Li highlighted the fuller potential of the tie-up, saying that Baidu would now concentrate on product integration, with its search service, maps function, group-buying platform Nuomi and payment app Baidu Wallet all pitched more aggressively to online travellers.

As such, the travel sector is another battlefield in the online-to-offline (O2O) war being waged by the three internet giants.

“China’s three largest internet companies are all seeking to capture more leisure travellers. Alibaba Group is expanding its Alitrip unit, and Tencent offered to buy out the 85% of eLong it doesn’t already own as they compete with Baidu,” Bloomberg confirms.

Less discussed in the media is what the deal might mean for consumers. But HSBC analysts predict that the consolidation means that there will be fewer discount coupons for travellers, with Ctrip and Qunar reducing the number of such sales offers. The new landscape may also see airlines and hotels coming under greater pressure from the online travel agencies to pay higher sales commissions.

The rapprochement between Ctrip and Qunar also looks like another case in which the struggle to dominate the 020 business isn’t necessarily leading to more choices for consumers. Baidu, Alibaba and Tencent have all called temporary truces in the vicious competition to win over new customers with crazily discounted offers (Didi and Kuaidi have joined forces as ride sharing apps, for instance, while Meituan and Dianping have cosied up in group-buying and food delivery services). All these consolidations are aimed at improving margins, with more M&A expected.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.