Talking Point

The O2O wars intensify

How China’s biggest tech start-ups are gobbling each other up

Mobike-w

In the dock: Meituan has just gobbled up Mobike

Unicorns are supposed to be rare beasts. Mythical, in fact. But according to a study in March by an affiliate of the Ministry of Science and Technology and a Beijing consultancy, there are at least 164 unicorns in China. Of course, these are not of the horned equestrian variety but are private companies in China with a valuation of $1 billion or more. The 164 corporate unicorns are worth a collective $628 billion calculates the study.

This week there was news that Ant Financial – the biggest Chinese unicorn of them all – is in talks for a private fundraising that could see the four year-old firm’s valuation jumping to about $150 billion. Ant operates Alipay, one of China’s largest payment platforms. It is also a third-owned by Alibaba, and another feature in the recent unicorn study is that Alibaba has invested in the largest number – 29 of them, followed closely by Tencent with 26.

That’s no great surprise. The two tech giants have interests in so many different industries that it is virtually impossible to publish an edition of WiC without mentioning them. And their reach is extending as they explore new ways of doing business – a trend that prompted each of them to make a move on two more of China’s unicorns earlier this month.

What were the two takeovers in the news?

Meituan-Dianping – an all-in-one app for food delivery, movie tickets, restaurant reviews and group discounts, with nearly 300 million customers – was valued at $30 billion in its most recent funding round in 2017.

Last week it swooped for Mobike, paying $2.7 billion (excluding debt) for the bike sharing firm. The deal is said to have been brokered by Pony Ma, chief executive of Tencent, which backs both companies.

Mobike’s main rival is Ofo, in which Alibaba is a major investor. And also this month there was news that Alibaba was taking full control of food delivery firm Ele.me, the main rival to Meituan’s food delivery service, in a buyout that values Ele.me at $9.5 billion.

The food delivery sector is expecting more than Rmb300 billion ($45 billion) in revenues this year, more than double last year’s sales, according to forecasts from Meituan.

Much of the media coverage of the two transactions has focused on the clash between Alibaba and Tencent, in light of the bitter rivalry that is driving their dealmaking. Companies the size of Mobike and Ele.me are simply being swallowed up.

“Mobike had insisted on an independent path, but little fish cannot eat big fish. In China, start-ups cannot stay away from the giants forever,” Wang Xiaofeng, Mobike’s chief executive, lamented at the board meeting that approved the sale, reported CBN, a newspaper.

So this is more about Alibaba versus Tencent?

The bitter competition between China’s e-commerce pioneer and its leader in social media and gaming is now well understood. Tencent takes top spot with its WeChat messaging app, delivering a billion users with trillions of hours spent online. In online marketplaces Alibaba is ahead and its affiliate Alipay is the bigger name in mobile payments, although Tencent’s WeChat Pay has been catching up fast (see WiC403).

Despite the different starting points, the two tech giants are converging on the same destination: an ecosystem that captures all their customers’ spending. The idea is to keep the other out – which is why buyers on Alibaba’s marketplaces can’t use Tencent’s payment service, and why links from Alibaba’s e-commerce platforms won’t work in the WeChat environment.

Something similar is starting to happen in traditional stores: last week we reported how Wal-Mart has dropped Alipay in favour of WeChat Pay in western China.

In the Mobike deal Meituan is taking control of a brand that is yet to post a profit. A former manager at the firm told Quartz last week that it needs each of its bikes to generate four rides a day to get into the black and that they are getting less than two trips per bike at the moment.

But beyond the rental revenue and the potential for advertising, bike-sharing companies also promote mobile payments and collect user data that can support other internet-enabled transportation. Purchases of platforms like these are part of a wider struggle for commercial control, and not just for an edge in bike rental or food delivery.

“As one of the most frequently used applications, food delivery is the single most important entry point in the local services sector,” Daniel Zhang, Alibaba’s chief executive, told staff in an email after swooping on Ele.me. “We can already see that a vast, multi-dimensional local instant delivery network formed through a food delivery service will be an essential piece of the commerce infrastructure.”

The bigger picture is a battleground in which Alibaba and Tencent are closing the gap between sales online and in traditional retail outlets, shops and restaurants. Described as ‘new retail’ by Alibaba, and ‘smart retail’ by Tencent, the two strategies are effectively the same: going after the large majority of the population which still buys its goods from bricks-and-mortar stores.

The model is to use online channels to grab offline sales – as a consequence the takeover trail in O2O (online-to-offline) has been frantic. In a small sample Alibaba has acquired stakes in Suning, a massive electronics retailer; Intime, a department store chain; and Sun Art Retail, a supermarket chain, while Tencent has put money into Wanda Group, a mall operator; and Yonghui and Betterlife, two supermarket chains. Tencent is also the biggest shareholder in JD.com, Alibaba’s main rival in e-commerce, which has announced plans to open a million convenience stores over the next five years.

The tech giants are also doubling down on the data that the sales process provides, with a growing belief in the commercial virtues of new reams of customer information for targeted marketing and cross-selling.

The same thinking applies to the bid for Mobike. “Mobike has a lot of ‘short-distance’ data and these travel insights can be blended with the ‘new retail’ landscape in what is seen as the ‘three-kilometre’ battleground”, Wang Ruchen, a financial commentator, told Beijing Youth Daily.

The message is similar from Alibaba, which previously delegated deliveries from its online platforms to third-party partners. The new bet on O2O means it must invest more in its own fulfillment capabilities and the Ele.me deal opens up the food platform’s infrastructure in urban districts. In effect, Alibaba has just added three million more delivery people to a distribution model that already promises quick-fire fulfillment in 20 core cities across the country.

What about Meituan? Is its war with Didi Chuxing?

Wang Xing, Meituan’s boss, would bridle at descriptions of his company as a pawn in a bigger game between Alibaba and Tencent. He runs a company that is ranked 5th in the recently published list of 164 Chinese unicorns. Along with Toutiao – the go-to app for 700 million Chinese to read and share news – and Didi Chuxing – the country’s dominant Uber-esque car ride-hailing service – it makes up the ‘TMD’ trio now classed just a notch below the more established Tencent, Alibaba and Baidu ‘BAT’ troika (Didi comes 2nd on the unicorn list, while Toutiao is in the 7th position).

Didi and Meituan are both focusing on joining the top table and the struggle between them to get there is going to be monumental. By taking control of Mobike, Meituan has put itself in pole position to challenge Didi’s plan to promote itself as a ‘mobility’ platform with ride-sharing, bike-sharing and car rental options.

But both firms are also taking aim at each other’s core businesses, with Didi trying to get a foothold in food delivery and Meituan making its own move into ride-sharing (see WiC396).

Services through Meituan’s ride-hailing app have just started in Shanghai and the plan is to go national, with invitations to customers to register for the app in other launch locations including Chengdu, Hangzhou and Wenzhou.

In fact Didi’s dominance of the ride sharing business since driving out Uber two years ago (see WiC336) has turned it into a target. Ctrip – the country’s leading online travel platform – has also just announced that it has a licence to start a ride-hailing business in Tianjin, while AutoNavi, Alibaba’s mapping unit, says it has been given the green light for a similar franchise in Chengdu and Wuhan.

The likely outcome is a savage round of fare discounting. Meituan has been wooing drivers with a lower cut of the fares than Didi, while AutoNavi says that it won’t take any fees from drivers who support it during the start-up period.

Didi typically charges commissions of up to 10% from each journey and although its executives have countered that the price-cutting won’t work for the new entrants over the longer run, they also admit that newcomers will destabilise the wider market. “We would like to thank Meituan for subsidising its users and growing the market alongside Didi,” its regional director Sun Shu joshed on WeChat in an initial attempt to make light of the situation. “But the subsidies are abnormally high, and they will lead to unofficial usage and fake orders, which will cause great harm to the entire industry.”

In food delivery it is Didi that is doing the damage after claiming victory in a recruitment campaign for drivers in its opening market of Wuxi that secured more than a third of food deliveries in the city after just three days of business.

However, this land grab also comes at a cost: Didi has been offering monthly pay of Rmb10,000 to deliverymen in Wuxi, the local media reports, compared to the Rmb6,000 salaries from Meituan in similar cities.

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Meituan’s staff are said to have steeled themselves for the struggle with the slogan “Take Down Ele.me, Wipe Out Didi”. Yet price wars like these were the backdrop to the merger of Tencent-backed Didi and Alibaba-backed Kuaidi three years ago at a time when both were chasing customers with discounted fares (see WiC272). Alibaba’s favoured group discount site Meituan merged with Tencent-supported restaurant reviewer Dianping to create Meituan-Dianping for similar reasons (see WiC300).

In each case the tech giants came to a deal after their candidates burned through billions of yuan in trying to tempt customers. Now the truce seems to be fragmenting as they fight for prime position in the O2O world through proxies like Meituan and Ele.me.

Another intriguing question is whether the winner of these wars could eventually pose a challenge to their major investors.

Back in bike-sharing, there were rumours last year that Mobike was set to merge with Ofo, before reports that the proposal had collapsed after concerns from other shareholders that Didi would become too powerful if the two firms tied up.

Relations between Ofo and its shareholder Didi are now said to be strained, and Didi has rolled out its own bike-sharing platform within its ride-hailing app in what looks like a move to constrain Ofo’s growth.

Significantly, fellow shareholder Alibaba made a move to increase its own stake in Ofo, when it led another round of financing last month (see WiC401).

Another possibility is that Meituan comes into conflict with WeChat, the ‘do everything’ app that serves as the fulcrum for Tencent’s portfolio.

After all, Meituan is championing a service that meets the daily needs of its customers. “Our services are location-based, that’s why we want our products to cover all aspects of life,” Chen Shaohui, its senior vice president for strategy, confirmed earlier this year in an interview. Chen is also committed to moving quickly into new areas. “We are very open to seeing what works. In any business we get into, we’ll start small. If it works, then we go big,” he promises.

“Meituan is becoming a significant force in itself. Yes, it still belongs to the Tencent camp. But within camps, Meituan is also trying to build its own ecosystem,” Zhou Xin, president of Beijing-based consultancy Jkinvest Bigdata told Bloomberg.

That means that managing the relationship with Meituan is going to be an important task for Tencent executives. WeChat Pay handles the majority of payments from Meituan’s customers at the moment, for instance. Meituan’s payment tool is handling about a fifth of transactions and if it has ambitions for more, it could clash with its investor.

None of this is likely to turn Tencent away from its strategy of betting on most of the field in the O2O story (our report about second-hand cars last week highlighted how it has stakes in most of the main online marketplaces, for example).

Its investment in Didi could provide a little leverage with Meituan too, although backing both horses may turn out to be expensive if Didi and Meituan throw billions of yuan into their own battle over ride-sharing and food delivery.

On the other hand, it means that both firms will have fewer resources to tussle more directly with Tencent. Unlike its more illustrious investor, Meituan is nowhere near profitable, despite revenues more than doubling to $5.4 billion last year, according to Reuters. But don’t bet against Tencent going for a full takeover if Meituan moves more quickly towards profit.


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