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Tencent, Alibaba and Investment Strategy In China

How the Chinese Big Three are aggressively continuing their expansion

14Mar

China's digital landscape consists primarily of three internet giants: Baidu, China's answer to Google; Alibaba, an e-commerce goliath and Tencent, a social media conglomerate (among other things). Known collectively as BAT, the three have grown to dominate the world's second-fastest growing major economy and, through aggressive investment strategy, have continued their growth even as the country slows.

2005 marked major steps forward for all three. Having been founded at the turn of the century, the three would wrest control from the likes of Sina Corp and NetEase Inc to become lasting powerhouses; Alibaba partnered with Yahoo, Tencent's QQ messaging service saw huge growth and Baidu launched on the NASDAQ (way before Google withdrew from China in 2010 over censorship and security issues), all within a year. These developments laid the foundations for the three-way power-share that has been swallowing other Chinese companies since.

The core business models of the three have been wildly successful, themselves becoming profitable, powerful multi-billion dollar empires. But their strategies have undergone a big change in recent years, culminating in 2015's investment rush. As the growth of their cores had shown signs of slowing, the three have been forced to up their M&A activity as well as making smaller investments that expand their reach. There was, according to Fortune, once a joke that went 'if a U.S. startup had a great idea, Google might buy it. If a Chinese startup had a great idea, Tencent might copy it.’ Recently this has changed, though, and you could say the three have turned decidedly venture capitalist.

Up until 2015, Tencent Holdings had been by far the most aggressive. The Shenzhen-based giants were relentless in 2014 and took part in 48 deals, making them 'a bigger venture capital player' than not only their Chinese competitors but also Google, according to Fortune. Tencent is already the world's largest games company, but the company is striving to become the head of a 'pan-entertainment' empire, made up of smaller businesses from different areas, allowing them to expand their reach. The push into the movie industry reflects China's current explosion of film - according to VentureBeat, 10 theatres go up a day.

Tencent's scope of ambition is remarkable and, if the investment patterns of their BAT competitors of late are anything to go by, it is shared across the trio. Tencent's expansion has a clear goal: the growth of Tenpay, which they hope will be the dominant force in online finance thanks to the creation of a mutually supportive shopping and socializing webspace. The giant doesn't ordinarily take controlling stakes in the companies it deems worthy of investment, rather it expects them to incorporate Tenpay into their model; think eBay and PayPal. Alipay - Alibaba's offering - still dominates China's mobile-payment market, but Tencent hope that their soft expansion can turn the tables.

Alibaba approached 2015 in something of a frenzy, though, with investments unparalleled by their rivals. The e-commerce behemoth made a huge 55 investments over the year, totalling $11 billion - 10 times that of Baidu and over double that of Tencent. According to BNP Paribas, 2016 is set to see the competition taken to another level, too, with $80 billion predicted in mergers and acquisitions from the trio as they continue to support fledgling startups and envelop companies they believe can increase their market share. Of course, these giants are unique in China in their capabilities, others do not possess the scale to compete, but the strategy of investment over competition can be beneficial for the smaller companies, too. Fortune take the example of LineO who, in January 2015, received $30 million from Tencent after a protracted negotiation process. After initial fears that the web giant would absorb the company and then copy its model, owner Wu Hao gave in. LineO gained access to a potential half-billion new customers through Tencent's WeChat and the giant bolstered numbers on their online payment network.

Expansion outside of China may not be so readily received - anti-Chinese sentiment in the region is brewing thanks to the rise of populism in South East Asia and territorial disputes over the South China Sea - but the developments of the Big Three are nothing short of staggering. And, as some of APAC's biggest companies move to offering venture capital over ruthless and domineering competition, the networks of connected companies - from startups to large, profitable businesses - will only grow, and the number of beneficiaries inside China and out will be far greater than three. 

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