A war for the Chinese Internet is taking place

A war for the Chinese Internet is taking place

Tencent, a leader in online messaging and gaming, stated last Monday, according to WSJ Wall Street Journal that it will pay USD 215 million for a 15 % stake in online retailer JD.com, in advance of that company’s planned U.S. initial public offering

Experts consider the offered amount for JD.com as cheap, valuing the entire company at below tangible book value. But Tencent is also giving JD.com the bulk of its online shopping sites, meaning outsourcing its e-commerce operations.

Up to now, Tencent was struggling to take ground from Alibaba, the dominant player in online commerce in China. Alibaba Taobao site has a virtual monopoly in person-to-person online trading, similar to eBay in the U.S. in the business-to-consumer space. Alibaba grip through its TMall site is not as tight, about half the market by transaction volume, according to research firm Analysis International. Second is JD.com with 18 %. When adding Tencent’s small e-commerce operations and the Tencent-JD.com team commands nearly a quarter of the market.

That earmarks a good launching pad from which to take on Alibaba. Tencent will direct traffic to JD.com stores from its massively popular WeChat and QQ messaging platforms. And JD.com can leverage Tencent’s payment platform, resolving one of the site’s main shortcomings, particularly in comparison to Alibaba’s well liked Alipay.

However, JD.com still faces some challenges. Unlike Alibaba, which leaves logistics to third parties, JD.com has an army of 18000 delivery people and a network of warehouses to maintain. The labour and capital intensive model left gross margins of just 9.8 % in the first nine months of 2013, and on a net basis the company was barely profitable, according to JD.com’s IPO filings to go public. That compares to a 73 % gross margin for Alibaba over the same period.

For Tencent, betting on JD.com makes more sense than continuing to invest in its own e-commerce sites. Together, the two firms make a formidable rival to Alibaba. Long quiet, China’s e-commerce front is about to see some real action.





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