GUEST POST-WeChat Story Part 5: Potent Partnerships
The following is Part 5 in a multi-part series about the rise of WeChat, the popular mobile instant messaging service owned by Tencent.
By Lanie Nie
Venture capitalists on Sand Hill Road always ask young entrepreneurs with little business knowledge what they would do if Facebook did the same thing, and similar concerns exist for China start-ups in dealing with the “Tencent factor”. With the strategic goal of providing users with “one-stop online lifestyle services”, nearly everything has become a must-have for Tencent, making it a public enemy for the entire community of Internet-based service providers in China.
Tencent (HKEx: 700) itself is no stranger to the practice of copying popular business models, starting its own life by copying the popular ICQ desktop instant messenger. It has sometimes been criticized for not only taking ideas from Silicon Valley, but also playing similar tricks on other Chinese tech companies. Four years ago, the weekly newspaper China Computerworld published a cover story titled “Damn Tencent”, accusing the company of kidnapping users, plagiarizing from opponents and crushing innovation with its aggressive tactics.
But that business model is changing. In 2011, Tencent established an Industry Win-Win Fund with an initial funding of 5 billion yuan ($813 million). The fund has been quadrupled since then, with 100-200 projects in hand. More recently when China’s 3 big Internet players, Tencent, Alibaba and Baidu (Nasdaq: BIDU), embarked on a major acquisition spree, Tencent has adopted a novel strategy that further departs from the imperialist approach of outright takeovers.
The different approach was first manifest with the strategic partnership between Sohu’s (Nasdaq: SOHU) Sogou search unit last September, which involved the transfer of Tencent’s smaller Soso search-related businesses to form a single company. That was followed by a similar stake-buy deal this March with e-commerce giant JD.com (Nasdaq: JD), which saw JD take over Tencent’s own smaller e-commerce services, including its Wanggou B2C, Paipai C2C and logistics personnel services. Tencent also conducted similar strategic equity tie-ups with partners like the Hong Kong-listed B2B platform CSC, restaurant ratings site Dianping and the taxi-hailing app Didi Dache.
Tencent’s answer to the arms race among the 3 Chinese Internet giants, at least for now, is to support one player per each vertical space, even at the expense of its own presence in the same businesses category. The basis for Tencent’s choices is how well its partners handle more traditional business functions, such as logistics systems, management of small- and medium-sized merchants and communication with taxi drivers.
A good example is JD.com, China’s second largest e-commerce company and the only major competitor for Alibaba in China’s B2C market. JD operates its own online store, holding inventory and offering its own delivery services to avoid third-party logistics firms that fail to meet its standards. The far larger and more profitable Alibaba only acts as a third-party facilitator for the direct sale of goods by other companies and individuals, and works with third-party delivery services.
Behind JD’s advantages in logistics are the decent salaries it offers for its nearly 20,000 deliverymen and years of heavy investment in building its own warehouses. According to its IPO prospectus, logistic-related investment by JD.com climbed to 4.1 billion yuan in 2013 from 144 million yuan 4 years ago. The amount is expected to increase further as the company expands its flagship logistic services across the country.
JD.com’s ambition is also in line with the diffusion of needs for quality goods and brand-name products from wealthy residents throughout China, from the more developed coastal regions to less developed areas of interior China. Data from Vipshop (NYSE: VIPS), China’s leading online discount retailer, underscores the potential of these smaller markets, as about 70 percent of its sales revenue actually comes from outside of first-tier cities.
To enhance the geographic presence of its brand and services in these smaller cities and more remote places, JD.com this year launched an initiative that saw it send volunteer deliverymen back to their hometowns for local business development. The new alliance with Tencent will seek to drive traffic to its e-commerce services via WeChat.
Lanie Nie is a writer, translator and participant observer of localization and internationalization efforts by Chinese technology, media and entertainment companies. She freelances regularly for Chinese business and technology news websites and can be emailed directly at lanienie@hotmail.com.
