Talking Point

All encompassing visions

As 2017 ends, which of China’s tech titans Tencent and Alibaba is ahead?

Ma-w

The dominant duo: Alibaba’s Jack Ma keeps a watchful eye on Tencent’s Pony Ma and his next move

We all know that nothing in life is certain except death and taxes. But for the South Koreans, Samsung is the third inescapable element of their everyday existence.

Indeed, some South Koreans call their country “the Republic of Samsung” because they are often born in a Samsung-owned hospital and educated in a Samsung-funded college before ending up at a Samsung-built funeral home.

The company is one of the chaebol, or large conglomerates that have dominated the Korean economy for decades. More recently Samsung has outgrown its rivals. In 2015, revenues from Samsung Electronics, the unit that makes its smartphones, were bigger than the incomes of LG and Hyundai combined. Sales from the Samsung Group at large equated to 72.5% of the Korean government’s annual budget.

Over in China, the biggest tech firms are now looking increasingly similar to the Korean chaebol in terms of their size and influence. These private sector firms – most notably Alibaba and Tencent – now reach into many facets of Chinese life. Their corporate rivalry in the world’s biggest internet market will go some way in deciding whether China can dislodge the US as the world’s biggest economy as well.

So if their current standings are anything to go by, is China shaping up to become “the Republic of Alibaba” or “the Republic of Tencent”?

How big have Alibaba and Tencent grown?

Baidu, Alibaba and Tencent are the three biggest tech firms, although the BAT acronym is starting to look less convincing as Baidu falls behind in the battle of the internet kingdoms.

Having gained about 40% year-to-date, the search engine’s market capitalisation hovers around the $80 billion level. That is less than one fifth of Tencent’s $470 billion or Alibaba’s $442 billion as of this week.

In the tighter two-horse race, the share prices of Tencent and Alibaba have nearly doubled since the beginning of this year. In mid November, Tencent was the first Chinese firm to be worth more than $500 billion (since then its shares have slid back a little). There are only five other members of this prestigious half-a-trillion club and they are all American giants. But their Chinese rivals have been catching up: the share prices of Apple, Google, Microsoft, Amazon and Facebook climbed less than 50% during the same period this year.

Currently Apple is the world’s most valuable firm with an $871 billion market cap. But if Tencent and Alibaba were to continue to outperform their US counterparts at this year’s pace, one of them would take the number one spot by mid-2019.

According to Kunpenglun, a popular zimeiti, or independent commentator with a reputation for posting on social media platforms such as WeChat, investors have been re-rating Alibaba and Tencent because they are convinced that the duo are becoming “the oligarchs of China”, especially in areas where the government has fewer restrictions on investment by private-sector firms. “Look at the Samsung empire if you want to know how Alibaba and Tencent will look in the future,” Kunpenglun suggested in a widely forwarded article last month. “Most possibly, Jack Ma and Pony Ma [the bosses of Alibaba and Tencent respectively] will become the two men that ordinary Chinese cannot avoid in their lives.”

Who is building the better ecosystem?

If Kunpenglun’s prediction is correct, this is a $1 trillion question.

When we published our special issue The Battle for China’s Internet in the spring of 2015, Alibaba and Tencent had just invested $8 billion in an M&A arms race with smaller tech firms. The pair have upped the ante of their epic rivalry since then, pushing forward into a range of different industries including banking, movies, logistics, cloud services and healthcare.

The sheer size and diversity of their portfolios have made it almost impossible for analysts to judge which ecosystem is superior (perhaps this is partly reflected in the similar market values at which the firms have been trading recently).

Maybe it is easier to go back to basics and look at both firms’ core strengths. As tech observers in China used to put it, Jack Ma has been prolific in “making money from women” while Pony Ma is the best at “making money from kids”. This fun-poking observation points to the cornerstones upon which the Mas have built their empires: Alibaba has dominated the realm of e-commerce, while Tencent rules the roost in gaming and social media.

The next step in an assessment of the two giants is how their respective strengths might allow them to make a play for new business areas. A natural extension to e-commerce is banking, for instance. And fintech is an area where Alibaba got a head start over Tencent, Southern Weekend suggests. The most recent fundraising round valued Ant Financial, Alibaba’s fintech sister firm that operates China’s most widely used payment app, at $60 billion in 2016. Tencent’s internet bank WeBank commenced operations much later and it has been playing catch-up since Bloomberg reported in January last year that a fundraising had valued the affiliate at $5.5 billion.

However, Tencent’s market share in mobile and online payments has been catching up with Alibaba at a rapid clip. Alipay still has a dominant market share of around 54% but WeChat Pay now accounts for 40%. Nowadays a Chinese consumer can get through an entire day using either method to pay for daily necessities, with Pony Ma joking at this week’s Fortune Global Forum that even beggars now accept WeChat Pay.

The battle for dominance…

Another battlefront for the two rivals is the O2O sector (online-to-offline) in which goods or services are sold to customers through online ordering, primarily using phone-based apps. Both firms have advantages in O2O. Alibaba is more of a specialist in online sales. But Tencent has WeChat, a mobile social media app that serves as a compelling shop window for O2O goods and services.

The skirmishing in the sector has been intense but neither side has found a way to prevail without spending billions of yuan on buying market share.

In one unusual instance they have opted for an uneasy truce: that occurred when they merged their ride-hailing apps, creating an all-powerful Didi Chuxing to take on Uber in China.

In other key areas their proxies continue to fight it out, such as the two-wheel equivalent of Didi – bike hiring apps. This week it was announced, for instance, that Alibaba was part of a consortium pouring $1 billion into Ofo. Earlier Tencent had increased its funding in rival service Mobike. Both firm’s bikes are now a dominant presence on China’s streets, with a roughly 50-50 market share (though neither is thought to yet be profitable).

Other high-profile tussles that WiC has highlighted over the past few months include food delivery (in this fast-growing sector Alibaba’s Ele.me is slightly ahead – after initiating a merger with Baidu’s smaller operation; see WiC386) and online cinema ticket sales (Tencent’s Maoyan-Weiping is ahead here – after another merger – with a 51.5% market share; see WiC390). Then there is the battle for eyeballs in the online video streaming sector, a major area of investment for both giants that we profiled at length in our Talking Point in issue 383; and in search engines (where Tencent-backed Sogou is growing far faster than Alibaba’s rival; see WiC389).

These days it is hard for a Chinese smartphone user to select an app on their phone that doesn’t involve making a choice between an Alibaba or Tencent affiliated player.

WiC’s prediction for 2018 is that we will see more and more investments by the pair in areas like artificial intelligence (AI), Big Data and healthcare (Pony Ma told the Fortune Forum that Tencent had already put money into a company that uses AI in medical scanning, claiming it was better than doctors at spotting cancer).

Definitely moving beyond clicks

Since last year Alibaba has been advocating a grander vision for “new retail” which, according to its chief executive Daniel Zhang, is based on “combining a ‘sky net’ with an ‘earth net’ and providing a one-stop solution for China’s most active 500 million shoppers”.

Such a strategy has seen Alibaba investing heavily in bricks-and-mortar assets. It is revamping Cainiao, its core logistics network, as a majority-owned unit, and it has been buying stakes in retailers such as the department store operator Intime, and Sun Art, which runs 450 hypermarkets across China.

In the process, Alibaba has turned itself into arguably the most influential commercial landlord in the country.

It also means that Ma’s firm could become a go-to partner for global brands. Even Starbucks, which plans to triple its store numbers in China to 10,000 outlets in nine years’ time, has teamed up with Alibaba this week to open a 30,000 square-feet roastery in Shanghai.

Alibaba may endear itself to the government, too, by creating more urban employment through its logistics and retail units (instead of working in factories that once produced goods for export, more of China’s huge army of migrant workers is now working in cities as delivery people, for instance).

How about Tencent’s model?

Tencent is also focused on e-commerce. It is aligned with JD.com, the number two e-commerce platform, which is trying to make up the gap with Alibaba.

Tencent took a 15% pre-IPO stake in JD.com for about $215 million in 2014. This stake is worth $8 billion as of this week. Besides sitting on a 40-times return, the investment offers a shortcut for Tencent into online sales and delivery (JD.com runs its own logistics network).

According to Kung-fu Finance, another zimeiti collective that publishes on WeChat, Tencent is more ring-fenced from the competition, because it is operating a “peerless business model”.

The company is almost immune from the threat of foreign competitors, Kung-fu Finance says – helped by the fact that services like Facebook, Twitter and Instagram are banned in China.

It has also turned WeChat into an utterly dominant, all-in-one aggregator of social media content and functionality. The app now has 850 million active users and many of them are loyal fans of Tencent’s other money-spinning offerings such as online games. The aggregation of features also explains the extraordinary stickiness of WeChat. Indeed, the Chinese media has concluded that WeChat is now so dominant that it is more powerful than a smartphone operating system. According to this view, consumers can make do without Apple’s iOS or the rival OS Android but they cannot afford to go without WeChat – as they then risk being isolated from its social universe. (The Chinese government estimates a collective 900 million hours per day are spent on WeChat – a third of the total time spent on the Chinese internet).

‘Don’t be evil’ applies in China too?

Google’s chairman Eric Schmidt once said he thought ‘Don’t be evil’ was “the stupidest rule ever” and the mantra was dropped from the tech giant’s code of conduct in 2015.

Tencent’s corporate vision is simpler: to be the most respected internet enterprise.

However, most respected by whom? Certainly, some of the company’s most popular offerings haven’t always won the approval of the Chinese government. More recently, state media outlets have been deeply unimpressed: the People’s Daily and Xinhua published a series of articles in the summer that singled out Tencent’s top grossing game Honour of Kings as “poison” and “drugs” for teenagers.

Tencent lost as much as $20 billion in market value following the attacks but the warning was largely forgotten as its share price later soared. (A 20 year-old player of Honour of Kings died of fatigue last month, see WiC390).

Given WeChat’s ubiquity, the social media app is always going to reflect some of the darker sides of Chinese society. For instance, the app’s ‘red envelope’ function allows money transfers between customer accounts but Legal Daily reported in June last year that ‘gambling rings’ were exploiting the function to operate “illegal 24-hour online casinos” across the country.

Three years ago Tencent said it had closed down 20 million WeChat accounts linked to prostitution. But Huxiu.com, a news portal that focuses on tech, reported in February that the sex industry is still one of the greatest exploiters of WeChat’s boundless world.

Over the years Alibaba has attracted its own share of criticism (most notably for not doing enough to limit the sale of fake goods), although Jack Ma has worked hard to keep his company in Beijing’s good books.

Underlying Alibaba’s mission to “make it easy to do business anywhere”, Ma is now championing the concept of the “digital Silk Road”, in what appears to be the internet extension of Xi Jinping’s cherished Belt and Road Initiative.

Does Beijing want a new chaebol?

After the all-important 19th Party Congress in October, the Wall Street Journal reported that the government was pushing tech firms including Tencent and Alibaba’s affiliate Sina Weibo to offer the state a stake in their companies.

The news trail then went cold but there’s logic in the suggestion that Beijing is wary of the increasing power of the tech behemoths. There are limits to the brave new world that Beijing will accept. If Tencent and Alibaba push harder and deeper into banking, for instance, their more settled relationship with the political powerbrokers will likely be put to the test. Given their current dominance, investors will likely view political risk as the main ‘known unknown’ in limiting the duo’s future prospects.

For now, no love lost?

At the Fortune Forum this week both tycoons spoke, with Jack Ma taking the stage first. When asked about the rivalry with Tencent, he praised Pony Ma’s firm and described it as innovative.

Later in the afternoon the moderator asked Tencent’s founder the same question. This time Pony Ma failed to pay similar compliments to Jack Ma or his company.

As moments go, it was telling.


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