Searching for answers

When Forbes ranked China’s richest tycoons a year ago, the top three slots were taken by the founders of Baidu, Alibaba and Tencent – the internet giants known locally by the acronym BAT. At that time Baidu’s chief executive Robin Li was the second richest man, just behind Jack Ma of Alibaba but ahead of Tencent’s Pony Ma. However, when Forbes recalculated its rankings last month, Li had fallen to sixth position, with his net worth shrinking almost a third to $10.4 billion (the Ma duo retained their top-three status). The fall in Li’s fortune came despite Baidu’s aggressive push for new revenues in the online-to-offline (O2O) sector. But will it begin to tick up again thanks to a new growth engine: the announcement last week of a joint venture with Citic Bank?

The rivalry between the BAT trio – which are seeking to dominate China’s internet – is frequently compared to a period in the third century when the states of Wei, Shu and Wu battled for supremacy. The era, known as the Three Kingdoms, was a particularly bloody chapter in history, characterised by battles for territory, deadly military innovations and alliances of convenience as the weak combined to repel the strong.

Back in the present day Baidu has tended to look the weakest of the BAT kingdoms, with its core search engine business seemingly outflanked by Alibaba’s dominance in e-commerce and Tencent’s stranglehold of social media with WeChat.

Possessing cash-rich and fast-growing businesses, each of the Ma monarchs has been looking to expand their territories through acquisitions and dealmaking. But after its unexpected coup last week – in linking itself to a major state-run bank – might Baidu regain the upper hand in its battles with Alibaba and Tencent?

A more eventful year for Baidu?

Baidu started 2015 with a bang, investing $600 million for a stake in Uber. The partnership allowed the American car-hailing firm to tap into Baidu Map, a service with 240 million active users a month. Li also hoped the deal would give Baidu a competitive edge in one of the fastest-growing segments of the O2O industry.

What followed set the tone for a year in which Li’s kingdom suffered a series of strategic setbacks at the hands of his rivals. Kuadi and Didi, the leading local taxi-hailing apps – and each separately backed by Alibaba and Tencent – shocked Li and many others in China’s internet world when they announced a surprise merger in February.

Baidu’s two bigger rivals forged another unlikely O2O alliance last month with the $15 billion merger of group buying and food delivery websites Meituan – partly owned by Alibaba – and Dianping, backed by Tencent.

The merged entity has an 82% market share, easily outflanking Nuomi, which Baidu bought last year. As with car-hailing, once again Alibaba and Tencent were threatening to crowd out a market that Baidu had newly entered. (That said, Alibaba is now reportedly in talks to reduce its stake in Meituan-Dianping and grow a wholly-owned equivalent of its own.)

Following Baidu’s announcement of disappointing first quarter results, investors were rattled further in April by a high-profile clash between the firm and one of its major advertisers. The Putian Health Industry Chamber of Commerce, which represents about 8,600 private sector hospitals, threatened to boycott Baidu’s search engine for overcharging it for online advertising (thesefees contribute about 10% of Baidu’s annual revenue, see WiC276).

“The fact Putian felt bold enough to boycott Baidu earlier this year shows the company is no longer the monolith it once was,” believes tech analyst and blogger Doug Young, adding that Baidu is struggling to maintain its dominance in the search engine business. “Baidu’s former control of 70% of the market had been reduced to about 55% by the end of last year while Haosou [run by Qihoo 360] and Sohu’s Sogou controlled 30% and 13%, respectively,” Young claims.

Adding to Baidu’s discomfort, Alibaba has stepped up its efforts to court private-sector healthcare operators – a key source of Baidu’s earnings – and its Hong Kong-listed unit Ali Health declared this week that it will expand its internet-based medical services network, without specifying the amount of money it is going to invest.

The weakest link among BAT?

Despite the popular acronym, BAT has never been much of an equilateral triangle. A fairly miserable 2015 has also seen Baidu’s share price suffer. As of this week its market capitalisation stands at roughly $70 billion, considerably less than half of Tencent’s $189 billion, and some way further back on Alibaba, which is valued by investors at about $200 billion.

Over the past 12 months Baidu’s stock has dropped more than 15%. Tencent’s shares, which trade in Hong Kong, have climbed more than 30%. Alibaba’s comparables are less useful in this respect because it only went public in New York in October 2014. However, it is now about 18% above its IPO price. (And unlike Baidu and Tencent, some of the most promising assets in the Alibaba empire, such as Alipay, remain privately-held and unlisted.)

“The BAT used to represent China’s most influential internet firms. But the trend is evident that Baidu is dropping off from the big league,” suggests iHeima.com, a website focusing on investments in China’s tech space. “Maybe Baidu should instead be more worried about JD.com [an e-commerce platform which has market cap of about $40 billion].”

Although it is trailing in value creation, Baidu claims to be the most tech-savvy of the three tech firms. The company has been paying a lot of attention to projects such as visual internet search, self-driving cars, Baidu Eye (China’s answer to Google Glass) and Baidu Brain (again inspired by Google, it seems).

Emulation may well be the sincerest form of flattery, but perhaps Baidu has been trying too hard to make itself look like Google. And it is also tackling the same problem that its American equivalent faced five years ago: how to migrate its dominance of desktop PC searches and mapping services onto smartphones. While Google dealt with the issue by acquiring and then developing Android, an operating system for mobile phones, Baidu hasn’t made the same transition, lagging behind Alibaba and Tencent when it comes to capturing offline business opportunities in the era of the mobile internet.

Of course, WiC has reported on many of the dogfights between Alibaba and Tencent in O2O and mobile (also see our focus issue The Battle for China’s Internet). But Baidu seems to have spent too much time on the sidelines.

“Baidu’s mobile internet strategy is streets behind Alibaba and Tencent. When the latter two were taking on each other in bloody O2O battles over car hailing services [see WiC226] and wealth management products [see WiC225], Baidu was simply an onlooker,” iHeima.com points out.

How is Baidu playing catching up?

According to a report in Caijing magazine, Li told 150 tech bosses and investors attending a conference in San Francisco in July that he regretted not being more aggressive in buying into the mobile internet.

Baidu also estimates the O2O market to have grown to at least RMB10 trillion ($1.56 trillion), with a current online penetration rate that’s still less than 5%. The market is set to double in four to five years, the company has suggested.

As a result Baidu is doing more to expand beyond its core search business and in June it said it would invest Rmb20 billion ($3.2 billion) over the next three years on O2O services. The bulk of this investment will be pumped into Nuomi, which Baidu still hopes to transform into a platform where mobile internet users can buy just about any service.

In a telling indication of Baidu’s move to a more offensive footing, it has also planted flags areas uncolonised by its rivals. In August it invested $100 million in mobile-based, on-demand laundry firm Edaixi. The deal represented a rare victory over Tencent and Alibaba, Caijing reports, as both had also gone after Edaixi.

A similar approach in M&A has helped Baidu grab an advantage in China’s fast-growing online travel market too. In a convoluted deal inked last month, it traded away its controlling stake in Qunar to Ctrip, China’s biggest travel site. In return Baidu is getting 25% of the merged entity – which controls an estimated 61% of the market for flight bookings online, and 41% for hotel rooms (see WiC302).

Baidu now aspires to do much more than match information with search requests, setting out to match “people and services” as well, Caijing reports. The plan is to tap into its 643 million mobile search users and map users to offer localised services and then charge for them with its online wallet payment app.

“We are in a new development phase and we call it ‘indexing the real world’,” Baidu’s head of communications told the magazine.

The company said last month that revenues from its O2O platforms such as Nuomi and Qunar have risen to Rmb60 billion in the third quarter, as compared with Rmb40.5 billion in the previous quarter.

Next up O2O financial services?

Financial services has been regarded as another strategic weak-spot for Baidu. Alibaba and Tencent have advanced in this area via third-party payments, crowdfunding and wealth management products. Both have also been leading the charge into private sector banking.

Regulators have granted bank licences (in Alibaba’s case through Ant Financial, a sister firm) to challenge the monopoly grip of the state-owned banks. Earlier this year Tencent launched an online-only bank called WeBank (named after its popular messaging app WeChat) and Ant Financial followed with its Mybank.

Baidu’s year-end push into banking is clearly designed to close some of the gap. Teaming up with Citic Bank, the banking unit of financial conglomerate Citic Group, the pair have announced an initial investment of Rmb2 billion in their new venture, Baixin Bank.

Baixin is an attempt by Baidu to help Citic offer more efficient internet banking services. The first ever tie-up between a Chinese internet firm and a state-run lender, it also differs from rival banking ventures by combining Baidu’s ‘big data’ capabilities with Citic Bank’s physical retail presence.

Adding to its drive into banking, Baidu wants to make a splash in the insurance industry too. The search engine group said this week that it would be launching a joint venture with German financial behemoth Allianz and local investment group Hillhouse Capital to set up an online insurer. The trio intends to offer a range of products including travel, health and internet finance insurance, the Financial Times reports.

Of course, Alibaba and Tencent teamed up with Ping An Insurance in 2012 to launch their own O2O insurance venture. “So is Baidu throwing down the gauntlet in front of the three Ma’s [Jack Ma, Pony Ma and another Ma – Ping An’s boss Peter Ma]?” an internet user queried on Sina Weibo this week.

Should we add an X to BAT?

Earlier in the year pundits were voicing their views on whether the acronym was still relevant. “There will no longer be BAT. The future is about the competition of AT,” one columnist wrote on NetEase.

Others gave it a different spin, predicting that there were now ‘four kingdoms’ and the acronym should be extended to BATX – with the “X” standing for Xiaomi.

The five year-old start-up – founded by Lei Jun – completed a fundraising a year ago which valued it at $46 billion. The addition of Xiaomi to the mix would underline expectations that (like Apple) it will leverage its smartphone hardware, a point of difference from the BAT, which have grown without selling devices.

Other dark horses may emerge to rival Alibaba and Tencent and replace Baidu.

“BAT is likely to become ATX in the future,” Sina Technology predicts, adding that companies like Xiaomi, LeTV and JD.com are all threatening to contribute the “X factor” that Baidu is lacking.

Not everyone is writing Baidu off. “First came the investment in Ctrip and now we have the Baixin Bank. You can see Baidu is taking on more groundbreaking deals, while AT have turned relatively low key,” a tech columnist wrote recently in the Global Times. The columnist also expects Baidu to garner more attention next year if it launches its speech recognition and voice-based search services (for mobile) successfully.

Nor should we overlook the differing DNAs that spawned the three firms. Alibaba and Tencent have certainly shown more urgency in converting their digital leadership into a nakedly commercial masterplan and monetise as many services online as possible.

Perhaps there is something a little more idealistic about Li, evident in the name he chose for his company. ‘Baidu’ derives from a Song Dynasty poem about the persistent search for an ideal, represented by a beautiful woman (the relevant verse: “hundreds and thousands of times, for her I searched in chaos, suddenly I turned by chance, to where the lights were waning, and there she stood…”).­­

The poet in Li looks now to be swapping his calligraphy brush for a sword. Only time will tell if he can brandish it quite as powerfully as his larger foes…

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