Can Tencent Compete In Mobile E-Commerce?

| About: Tencent Holding (TCEHY)
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Summary

Competition in China's mobile e-commerce industry is intensifying, yet Alibaba has 84.2% of market share.

Tencent's recent investment in JD has yet to prove that it can convert WeChat users into JD buyers.

Social commerce is not a threat as Tencent and JD assert. It complements rather than replaces e- and mobile commerce.

Since Alibaba's record-breaking initial public offering, the Chinese behemoth has become a household name across North America and beyond. At over 600 million internet users, China has the largest online population in the world. Yet with internet penetration standing at just 46% of its total population, compared to over 80% in developed economies such as the U.S., there's room for growth.

As China's online population expands further, so too will total e-commerce transaction volume. Though online transactions still make up less than 10% of total retail sales in China, the former's market share will see stronger longer-term growth. Indeed, the National Bureau of Statistics reported that in the first three quarters of 2014, online retail sales grew nearly 50% year-on-year, while traditional retail sales saw just 12% growth. Accounting for 86.1% of China's total Mobile Gross Merchandise Volume ("GMV"), Alibaba remains the undisputed leader in e-commerce.

Nevertheless, the firm cannot afford to be complacent in today's competitive online environment. As China's online population grows, so too has the proliferation of mobile devices, and with it, online platforms supporting games, messaging, location, and social discovery have sprung up. China has the world's largest mobile Internet user base at 500 million. Moreover, mobile usage is expected to increase -- smartphone shipments in China reached 351 million in 2013 and will exceed 428 million in 2014, according to projections by IDC. Thus, Alibaba's investors will be watching closely to see if the firm can capitalize on areas where it has yet to establish its dominance. Fellow tech giant Tencent, through its dominance in messaging and 15% stake in JD.com, is seeking to chip away at Alibaba's market share in e-commerce. Tencent is likely to make some inroads into Alibaba's core business of online and mobile shopping, yet the latter possesses key strengths that will ensure it maintains its edge over the competition.

Tencent's Latest E-Commerce Foray: JD

In March of this year, Tencent invested in e-commerce firm JD giving JD access to Tencent's millions of users who interact with each other on WeChat. WeChat is Tencent's popular chatting app. As part of the deal, JD agreed to acquire Tencent's struggling QQ Wangguo B2C and PaiPai C2C platforms in exchange for Tencent directing traffic on its WeChat mobile messaging app to JD's platforms. Given that WeChat Wallet, an online payment service, is embedded in WeChat, the synergies are clear. Yet Tencent may try to go even further in the mobile realm by providing a full platform to support the daily purchasing activity of its 468 million monthly WeChat users. Tencent lacks platforms akin to Taobao or Tmall, yet the potential for WeChat to either direct its chatters into becoming buyers on JD.com, or enable the purchase of goods and services directly through WeChat, could present new opportunities in social commerce.

Yet Alibaba is not complacent in either the social or mobile realm. For the last quarter, the firm's mobile GMV as a percentage of total GMV totaled 35.8%, reflecting continued growth. Moreover, Alibaba recently cemented a number of strategic acquisitions and alliances to enhance its mobile offering, including an 18% stake in Weibo, a Chinese microblogging site with 500 million users. Moreover, the firm's messaging platform, Laiwang, is seeking to make inroads with consumers by supporting more gaming and allowing users to create groups in which they can share, like, and comment on content.

While WeChat remains much more widely adopted among Chinese consumers, Alibaba's investments in mobile will allow it to apply the insights of social activity to its e-commerce platforms, particularly in improving discovery. This in turn would drive even further growth in its platforms, which already maintain significant advantages over JD in terms of total offerings and sheer scale. Indeed, JD's market share in mobile e-commerce is a paltry 5.3%, significantly lower than Alibaba's Taobao's market share of 84.2%[iResearch]. Hence Alibaba remains the clear frontrunner in total transaction activity, supporting USD9.3bn of sales on China's Singles' Day alone.

Other reasons for optimism towards Alibaba is JD's still nascent partnership with Tencent. The majority of mobile growth reported by JD's business-to-consumer site in the third quarter of 2014 came from the firm's native app, rather than conversion from QQ or WeChat. Indeed, Tencent has not disclosed the GMV that WeChat generates, indicating Tencent and JD have yet to fully convert chatting intent into purchasing intent, much less purchasing activity. Furthermore, WeChat's active user growth amounted to just 6.8% for the past quarter, its slowest since it began publishing numbers. Tencent is seeking to expand its international user base for WeChat, but faces stiff competition from Facebook's Whatsapp.

Is So Called 'Social Commerce' a Threat as Tencent and JD Assert?

Ultimately, the question becomes whether or not Tencent can lead its users to approach its platforms with the intent to buy. What Tencent lacks and what Alibaba offers is precise buyer traffic, similar to that of US firm Amazon. As of yet, Tencent's WeChat is web traffic that has a discounted value, since its traffic lacks commercial intent. Alibaba maintains a far stronger ecosystem for directing and managing a wide range of consumption activities, and given the company's present scale and financial clout, is likely to continue doing so. Tencent has a leg up in mobile, but Alibaba provides a far more established platform that enables, and profits from, outright transactional activity.

In its initiation report, Morgan Stanley expressed these same concerns. Morgan Stanley questions whether Tencent's e-commerce efforts will increase in the foreseeable future and said it will be gradual at best, stating that social commerce complements rather than replaces e- and mobile commerce, pointing to the more gradual adoption that occurred even in more developed markets like the U.S.

To be sure, investors will keep a close eye on the rapidly changing Chinese trends and will monitor Tencent alongside other major Chinese Internet companies; but whether or not Tencent can monetize its millions of users on the scale of Alibaba remains to be seen.

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