March 19, 2014 4:14 pm

Chinese internet: Mobile wars

China’s big three online rivals are transforming inefficient sectors of the economy
A man looks at the screen of his mobile phone at Pudong financial district in Shanghai©Reuters

Finger of fortune: nearly half a billion Chinese now use smartphones, bringing vast revenue to Baidu, Alibaba and Tencent

Within the past few months it has become impossible to hail a taxi at rush hour in Beijing. Instead of stopping for outstretched arms, drivers are chasing richer prizes: smartphone users who have downloaded an app that pays both parties for a ride.

The apps give a rebate to the passenger and a tip to the driver. They help cabbies, who have long complained that prices are held artificially low by state fiat. Many will not pick up passengers at peak times unless cars are ordered online. With the apps, users can offer an extra tip in advance, creating a market price for taxis where none existed before.

The two competing apps are fielded by rival Chinese internet conglomerates, and for now consumers and drivers are reaping the rewards. Didi Dache [“Honk Honk Taxi”] and Kuadi Dache [“Fast taxi”] have spent millions of their investors’ money.

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Cheap taxis are just one of the spoils of a new war between China’s three internet giants, known collectively as BAT – short for Baidu, the dominant search engine, Alibaba, which controls 80 per cent of China’s ecommerce, and Tencent, the gaming and social media juggernaut with a market capitalisation of $132bn. For Wang Ran, a blogger and founder of China eCapital, an investment bank, the competition between Didi, a Tencent app, and Alibaba’s Kuadi is “the first battle in the first world war of the internet”.

For several years these groups – each of which sits comfortably on the list of the top 10 internet companies in the world – were content to nurture their natural monopolies in peace. But in the past six months they have engaged in a frenzy of acquisitions to compete with each other in just about every market imaginable.

Their expansion highlights rapid evolutions in the Chinese internet market, a source of wealth and power that challenges the country’s traditionally state-led economy.

Two factors have shaken up the cosy world of China’s internet. The first is that internet companies have become the largest private-sector companies in China by capitalisation and revenues and are awash with cash. Second, the arrival of the mobile internet has given them something to fight over. Nearly half a billion Chinese use smartphones that cost as little as $50 each to get online.

“Before, each of these companies had a distinct sphere, but with the arrival of mobile internet there is more and more convergence on a single model, and more areas of overlap. That’s where the battle lines are now,” says Arthur Kroeber of Gavekal Dragonomics, the research group.

Most of the new acquisitions have been made with mobile in mind. Baidu paid $1.9bn in July for 91 Wireless, an app store designed to give it an edge with mobile users. Alibaba has an undisclosed stake in UC Web, China’s top mobile browser. Last month Alibaba made an offer for AutoNavi Holdings, a mapping service, valuing it at $1.6bn, and allowing it to compete head-to-head with Baidu’s mobile map app.

Nine days later Tencent said it would take a 20 per cent stake in Dianping, China’s best-known restaurant rating and reviews website. On March 10 Tencent took a 15 per cent stake in JD.com, the largest ecommerce company after Alibaba. Media reports have since said Tencent is discussing a deal to merge its online video business with Sohu, China’s third-largest video platform.

Jenna Qian of Qunar, China’s biggest travel website by traffic, which is part owned by Baidu, says: “There is a convergence going on. People are competing to be the most convenient user experience, and there is this fear that ‘if I don’t provide travel then Tencent or someone else will’. These guys might be happy to sit there with their virtual monopolies and huge margins but that’s not going to last very long, and that’s why there is this big rush.”

Mr Wang of China eCapital says the BAT conglomerates want to become ubiquitous by monopolising every aspect of daily life that could conceivably be put on the web and sold to the public. “BAT want to be with you 24 hours a day, seven days a week, they want to get to know you, they want to date you, they want to have you,” he wrote.

China’s internet giants are becoming what analyst Anne Stevenson-Yang of J Capital Research calls “tech Kereitsus”, referring to the national champions that dominated the Japanese economy in the 20th century with interests in multiple industries. “When companies are this big in China, the difference between public and private is not that important,” she says. “For all intents and purposes these companies have become the ministry of the internet.”

BAT has also begun to expand into the more traditional economy, with ambitions to rationalise some inefficient state-owned sectors, including taxi services. The biggest onslaught has been in financial services. Alibaba began the rush last autumn when it set up Yu’ebao, a money-market fund. It paid a multiple of the state-fixed Chinese banks’ deposit rate, and claimed in March to have attracted more than Rmb500bn ($81bn) in the first nine months. Tencent offers a similar money market fund called Licaitong. So does Baidu, through its Baidu Wealth Management.

However, efforts to push further into finance have met resistance. Last week the central bank suspended “virtual” credit cards issued by Alibaba and Tencent as well as mobile payments made by scanning bar codes. “Banking is a red line they’ve started to cross,” says Duncan Clark, chairman of the telecoms consultancy BDA China. “Online there is virtually no regulation whereas offline the regulation is so cumbersome as to stifle activity. Think of the most inefficient areas of the Chinese economy and this is where these guys are going to be the most effective.”

The notorious inefficiency of the state sector, which still controls most of the economy, creates opportunities. “For us, our market economy has only been here for a few decades,” Robin Li, the head of Baidu, said in January. “Our traditional industries have not been very mature before they were hit by the internet.”

One example is in retail. Jack Ma, chairman of Alibaba, argued recently that unlike shoppers in the US who see ecommerce as “dessert” to their main shop offline, many Chinese see Alibaba websites such as Tmall and Taobao as the only realistic options. “In China, because the infrastructure of commerce is so bad, ecommerce becomes the main course,” he said. He predicts it will eventually reach 30 per cent of total retail consumption compared with 6 per cent today.

. . .

Until now, most of China’s private wealth was generated by access to state sectors but the internet is changing that. As Baidu’s New York listed shares surged, Robin Li became China’s richest man in December, worth $12.2bn according to estimates of the Bloomberg Billionaire Index. A month later he was eclipsed by Pony Ma, the head of Tencent, worth $13bn after a surge in Tencent’s share price. Alibaba’s Jack Ma could yet take the top slot once his company completes a much anticipated initial public offering in New York this year, expected to value the company at up to $200bn, according to some analysts’ estimates.

Such huge valuations have raised eyebrows. Alibaba, which makes the bulk of its revenues by selling advertising on its sites to would-be sellers, publishes very little information. Yahoo of the US, which has a 24 per cent stake, releases just four numbers each quarter without any accompanying detail: sales, gross profit, operating profit and net profit. “The numbers being talked about for Alibaba are quite generous given how little we know about them,” says one analyst.

Likewise Tencent sites QQ and WeChat claimed more than 815m and 271m active users respectively, according to third-quarter results last year. Yet the China Internet Network Information Centre, part of the Ministry of Industry and Information Technology, puts total internet users at just 618m.

The huge multiples on Chinese internet stocks are dwarfed by some of their even frothier US counterparts. But thanks in part to the suspended disbelief of the global internet industry, China’s internet conglomerates are the largest private companies in the country by market capitalisation.

. . .

The distinction between private and state business is hazy in China. The private sector is not free of state control, foreign investors have difficulty exercising influence and large companies cannot escape the orbit of the bureaucracy.

“There are two types of private companies in China. There are those that are very low-level and small, who fly under the radar. But once a company grows to scale, it has to align its interests with the political establishment or it won’t survive,” Ms Stevenson-Yang says.

Each seems to be growing into a pseudo fiefdom. Tencent is based in the southern city of Shenzhen. Alibaba is based in Hangzhou and the constellation of companies in its orbit is concentrated nearby in Shanghai. Baidu occupies the north, based in Beijing. Ms Stevenson-Yang says this reflects the overall distribution of power in China, with competing regional political clans. “Business is a mirror of the bureaucracy,” she says.

Each of the big three is so big, so wired in politically and so vital to the Chinese economy that its survival is assured. An employee at one of the companies likened BAT to Oceania, Eurasia and Eastasia, the superstates of George Orwell’s novel Nineteen Eighty-Four, which are so big as to be undefeatable and permanently at war.

For years Alibaba blocked Baidu’s internet crawlers from its website as they competed on search. The logic shifted with the emergence of Tencent’s popular messaging app WeChat as the chief threat to Alibaba’s ecommerce platform. Now Baidu’s crawlers are welcome on Alibaba sites. “One day it’s Oceania has always been at war with Eurasia, while the next day Oceania has always been allies with Eurasia,” says the employee.

The liberalising influence of the internet does not appear to extend to politics. One internet entrepreneur walked out of an interview when asked about the “Great Firewall” and pervasive censorship. As a western analyst says: “They know better than to say anything about politics or regulation. There is simply no upside.”

Most of China’s big companies have benefited from the Great Firewall, which blocks western competitors such as Twitter, Facebook and sometimes Google. But this may be changing. China’s big internet brands are now big enough to no longer be threatened by foreign competition, while their share prices could gain from a freer and more open internet.

As they grow beyond China’s borders, though, censorship could make them vulnerable to lawsuits.

“If they want to expand abroad, the Great Firewall becomes an obstacle for them and not a protection,” says Michael Anti, a Chinese journalist. “But don’t expect these guys to start fighting. This is China and if you co-operate with the establishment you can make a lot more money than by fighting against it. Even Microsoft and Yahoo co-operate, so why should you expect some Chinese guy not to? They will only stand up if their licences get too expensive.”

Additional reporting by Zhao Tianqi

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Corporate cultures: The laid-back, the cut-throat and the cult of the founder

Baidu, Alibaba and Tencent are all bidding to dominate the internet but they have their own distinctive styles. They tackle different niches and operate in different geographical bases around China. They also have very different corporate cultures.

Baidu, with its panda paw logo and a name inspired by an ancient poem describing a persistent search for the ideal, is a company driven by engineers. Run by Robin Li, a Silicon Valley veteran, it has flexible hours, no dress code and workers are instructed not to use honorifics in addressing each other.

Tencent, which has launched a charitable foundation focused on the disadvantaged and the impoverished, has a reputation as nurturing a cut-throat culture, typified by the fact that it runs two messaging companies, QQ and WeChat, which compete against each other.

Former employees use words such as “fanatical” and “cult of personality” to describe the atmosphere at Alibaba, a brand that the founder says he chose because it was easy to spell and globally known.

The company, which is gearing up for an initial public offering, is based around worship of Jack Ma, a business leader given to flamboyant dressing. He has appeared at staff parties dressed as a member of the heavy metal band Kiss, as Snow White and as Arnold Schwarzenegger in Terminator.

Against the market dominance and distinctive cultures of the “BAT” leading three, the struggle for second-tier internet companies is how to get noticed. “The ramp to the top has gotten a lot steeper recently,” says the press secretary to one smaller operator.

When Qihoo 360, a search and cyber security company, threw an end-of-year office party in January, it gave away seven Audi cars, a Porsche Cayenne and invited a Japanese porn star to present the gala. That triggered a number of copycat Japanese porn star events by second-tier internet rivals.

“Why do internet companies like to invite porn stars to their parties?” mused a headline in China’s 21st Century Business Herald in February. “Smaller companies want their galas to be top news on the internet, to be noticed by the mass public . . . And IT engineers like porn stars.”

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